
H£i75 



Class 
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COPYRIGHT DEPOSE 



PRINCIPLES OF 



ki 



POLITICAL ECONOMY 



BY 



CHARLES GIDE 

PROFESSOR AT THE UNIVERSITY OF MONTPELLIER, LECTURER ON 
ECONOMICS AT THE PARIS LAW SCHOOL 



SECOND AMERICAN EDITION 

ENTIRELY RE-TRANSLATED FROM THE LATEST FRENCH ORIGINAL 
AND ADAPTED TO THE USE OF AMERICAN STUDENTS 

BY 

C. WILLIAM A. VEDITZ, Ph.D., LL.B. 

SOMETIME FELLOW IN SOCIOLOGY AT THE UNIVERSITY OF PENNSYLVANIA 
PROFESSOR OF ECONOMICS AT BATES COLLEGE, LEWISTON, MAINE 



O y O - 3 , 



BOSTON, U.S.A. 
D. C. HEATH & CO., PUBLISHERS 

1904 



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X^: / 



LIBRARY of CONGRESS 
Two Copies Received 

DEC 24 1903 

Copyright Entry 

CLASS *- „ XXc. No. 

COPY B 



Copyright, 1891 and 1903 5 
By D. C. HEATH & CO. 



e « * • * « I « 



TRANSLATOR'S PREFACE 

The fact that Professor Gide's "Principes d'Economie 
Politique " has gone through eight editions in the original 
French and been translated mto the Russian, Swedish, Polish, 
Dutch, Finnish, Spanish, and Bohemian languages, furnishes 
presumptive evidence of its usefulness. The first English 
translation, published in 1889, has been very widely used in 
England and America as a college text-book, despite numer- 
ous features of this translation which placed it at a disad- 
vantage when compared with other text-books designed to 
supply practically the same need. These features have 
been pointed out from time to time by benevolent critics ; 
but the continued extensive use of the book with classes in 
political economy led the publishers to conclude that a new 
edition, without the objectionable features, and adapted more 
closely to the needs of American college classes in economics, 
would find an even wider acceptance than the first English 
translation. 

The successive French editions of the work have under- 
gone numerous and important changes, — changes not so 
much in the general scope and spirit of the book as in the 
manner of presenting certain sections of the subject. The 
fundamental purpose, has remained precisely the same : to 
give the reader a plain statement of the accepted principles 
of economics, a summary of the unsettled problems of the 
science, and a clear, brief, and impartial outline of the 

various solutions that have been proposed. 

iii 



IV TRANSLATOR S PREFACE 

The book as now issued, however, is not a mere transla- 
tion of the eighth edition of the original, published some 
months ago. In some respects it is more, and in others less. 

I have, in the first place, eliminated all distinctively 
French illustrative material which could add little or noth- 
ing to the value of the book in the hands of American 
readers. For this French material I have substituted data 
from American sources ; and in so doing I have endeavored 
to quote the latest and most reliable authorities. The vol- 
ume contains a vast amount of statistical and other illus- 
trative material which, I trust, will give the book a vitality, 
a closeness to real industrial life, and a smack of American 
" up-to-date-ness " which ought not to be objectionable, but 
which is unfortunately so rare in economic text-books. I 
see no sound reason why political economy should be re- 
garded — as it undoubtedly is regarded by a large number 
of students — as a recondite study dealing with all manner 
of uninteresting theoretical minutiae. No subject is, as a 
matter of fact, more intensely practical. The undue em- 
phasis on purely doctrinal matters, unaccompanied by any 
appeal to the facts of economic experience or history, and 
with apparently no regard for. the problems that are now 
demanding a solution, cannot improve the reputation of 
political economy. It is to be hoped, therefore, that the 
present accumulation of illustrative material will counteract 
this tendency. Although Professor Gide himself gives an 
abundance of statistical and historical data, I have gone 
even further in this direction. In the discussion of protec- 
tive tariffs I have given a history of our own tariff legis- 
lation ; in connection with the discussion of metallic money 
and of paper money I have outlined our own instructive 
monetary experiments ; and in the treatment of the prob- 



TRANSLATOR S PREFACE V 

lems of bank organization I have sketched the history of 
banking in the United States. 

In the second place, I have suppressed a few notes of 
interest only to the French reader, and I have entirely 
omitted the appendix on French finance. This appendix 
appears to have been little used in the previous English 
edition, and certainly is of no more value to the American 
student than a sketch of German or English public finance. 
There was really no valid reason for its retention in the 
present edition. It would, to be sure, have been possible 
and perhaps even desirable from some points of view to 
substitute a sketch of American public finance. There are, 
however, several excellent small text-books which cover this 
subject much more satisfactorily than the twenty-five or 
thirty pages of an appendix. 

In the third place, some of the sections on Distribution 
and on Consumption seemed hardly abreast of American 
investigations in these exceptionally important domains of 
economic science, and I have therefore taken the liberty 
here and there to add whole paragraphs and pages. This 
added matter, however, is purely expository and supplement- 
ary, and is in no wise discordant with the avowed purpose 
of Professor Gide's book. For he has assured me personally 
and declared repeatedly, that his primary object is to give 
the student an idea of all the solutions which have been 
proposed for mooted problems ; and certainly the work of 
American, English, and Austrian economists in the field 
of distribution is entitled to as much consideration as the 
exploded doctrines of the older schools. 

Except for these changes, I have tried to adhere closely to 
the thought of the author. Wherever it has seemed neces- 
sary to choose between good English style and fidelity in 



Vi TRANSLATOR'S PREFACE 

rendering the thought or attitude of the original, I have not 
hesitated to sacrifice the former to the latter. Some of the 
peculiarities of style are due to this ; for the others I must 
bear the blame. 

It would be ungrateful not to acknowledge the assistance 
rendered in the preparation of this book by Dr. Alvin S. 
Johnson, of Columbia University, who offered many sugges- 
tions with regard both to the contents and the style, and by 
Mr. William T. Foster, of Harvard University, for carefully 
reading the greater part of the proof and pointing out innu- 
merable possibilities of improvement in English. I am also 
greatly indebted to Professor Gide himself for the keen and 
constant interest he has shown in the present translation. 



C. WILLIAM A. VEDITZ. 



Bates College, 
Lewiston, Maine, 
November, 1903. 



FROM THE AUTHOR'S PREFACE TO THE 
EIGHTH EDITION 

The first edition of this book was published twenty years 
ago. During this period — grande mortalis cevi spatium — 
the progress of sociological thought has been so rapid that 
opinions which were then held to be revolutionary now 
incur the danger of being regarded as commonplace. The 
small school — then in its infancy — which I named the 
" school of solidarity," and which adopted a line of thought 
between "liberalism," on the one hand, and "collectivism," 
on the other, has grown to eminence ; what was then a 
small, unfrequented path is now a highway traversed by 
the masses. 

Nevertheless, I am well aware that economists of the 
classical school regard this book as deplorably uncertain 
on the old principles; economists of the new deductive 
school find that it is weak in pure theory and fails disas- 
trously to distinguish the art of economics from the science ; 
and economists of the historical school consider it insuffi- 
ciently concrete and too closely attached to the old classi- 
fications devised by J. B. Say. I believe that all of them 
are right, — especially as the title " Principles " is badly 
chosen and leads one to expect what the book does not 
contain; if it were not old already, I should change the 
title, and if ever I find the time I shall recast the book 

entirely. But as an excuse I plead that it was not my 

vii 



viii FROM THE AUTHOR'S PREFACE 

intention merely to prepare a book for students. What I 
have endeavored to do is to give a general description, 
rather than an analysis, of the economic world — of the 
vast domain in which we live and move without knowing 
very well whither we are going. I have sought to arouse 
curiosity and interest in economic problems rather than 
always to furnish cut-and-dried solutions. I have tried not 
so much to convey absolute conviction based on scientific 
laws that are still imperfectly understood, as to impart a 
sincere and fervid desire to discover the truth. I have, 
moreover, tried to make political economy, which in France 
has long borne (without much protestation) the name of 
tedious literature, appear to the beginner as an attractive 
and captivating subject. I know from personal testimony 
that among the readers of various nationalities who have 
studied political economy in these pages, there are at least 
a few who have found the science interesting, who have 
learned to love it, and who will continue to be devoted to it. 

CHARLES GIDE. 



CONTENTS 
BOOK I. GENERAL NOTIONS 

PAGE 

I. The Object of Political Economy 1 

II. Whether there are Natural Laws in Political Economy . . 3 

III. The Formation of Economic Science 7 

IV. Differences of Opinion concerning Method ... 13 
V. The Various Economic Schools of Thought .... 22 

§ 1. The Liberal School 23 

§ 2. The Socialist School 28 

§ 3. State Socialism 32 

§ 4. Christian Social Eeform ...... 35 

§ 5. The Doctrine of Solidarity 38 

VI. The Wants of Man 40 

VII. What is Wealth ? 46 

VIII. What is Value? 49 

§ 1. Utility 52 

§ 2. Labor . 59 

IX. W^hat is Price ? 64 

BOOK II. PRODUCTION 

PART I. THE FACTORS OF PRODUCTION" 

CHAPTER I. LABOR 

I. On the Part played by Labor in Production .... 71 

II. How Labor Produces 73 

III. The Evolution of Ideas concerning the Productivity of Labor . 75 

IV. Pain as a Factor of Labor ........ 80 

V. Time as a Factor of Labor 83 

CHAPTER II. NATURE 

I. Environment 86 

II. Land 89 

III. Raw Materials 91 

IV. The Law of Diminishing Returns 92 

ix 



X 



CONTENTS 



V. 

VI. 

VII. 



I. 
II. 

III. 

IV. 
V. 



Motive Forces 

The Illusions to which Machinery has given Rise 
Whether Machinery is Detrimental to the Working Classes 



PAGE 

96 
103 
110 



CHAPTER III. CAPITAL 

The Two Concepts of Capital 116 

The Distinction between Wealth which is Capital and Wealth 

which is not Capital ........ 120 

What is meant by the " Productivity " of Capital ? . . . 124 

The Durability of Fixed and of Circulating Capital . . . 127 

How Capital is formed . 129 



PART II. THE METHODS OF PRODUCTION- 
CHAPTER I. THE ORGANIZATION OF PRODUCTION 

I. The Stages of Industrial Evolution 132 

II. How Production is regulated ....... 137 

III. Crises 142 

IV. Overproduction and the Law of Markets 147 

V. Competition 151 

CHAPTER II. ASSOCIATION 

I. The Successive Forms of Association .156 

II. The Association of Capital . . . . . . . .159 

III. Large-scale Production ........ 161 

IV. Is the Tendency toward Large-scale Production Inevitable and 

Desirable? 166 

CHAPTER III. THE DIVISION OF LABOR 

I. The Successive Forms of the Division of Labor .... 173 

II. The Conditions of the Division of Labor 176 

III. The Advantages and Disadvantages of the Division of Labor . 178 

BOOK III. THE CIRCULATION OF WEALTH 



CHAPTER I. EXCHANGE 

I. The History of Exchange . 

II. Exchange Value 

The Utility Theory 
The Cost Theory .... 
III. How Value is measured by Exchange 



184 
186 
189 
193 
196 



CONTENTS xi 



IV. The Advantages of Exchange 

V. The Means of facilitating Exchange . 

VI. History of the Part played by Merchants . 

VII. The Means of Transportation 

VIII. The Division of Barter into Sale and Purchase 



CHAPTEE II. METALLIC MONEY 



197 
201 
201 
206 
210 



I. The History of Money ........ 213 

II. Is Money a Superior Kind of Wealth ?..... 219 

III. Disturbances caused by Fluctuations in the Value of Money . 223 

IV. Whether Metallic Money will continue to decline in Value . 228 
V. The Conditions which should be fulfilled by All Good Money . 232 

VI. Gresham's Law .237 

VII. The Necessity of employing Several Metals, and the Difficulties 

which result therefrom 241 

VIII. Why Bimetallist Countries really have but One Money . . 246 

IX. Whether it is Advisable to adopt the Monometallic System . 250 

CHAPTER III. PAPER MONEY 

I. Whether Metallic Money can be replaced by Paper Money . 258 
II. Whether the Creation of Paper Money is equivalent to the 

Creation of Wealth . 265 

III. The Dangers resulting from the Use of Paper Money, and the 

Way to prevent them .'.. = ... 269 

IV. American Paper Money 273 

V. How even Paper Money may be dispensed with . . . 280 

VI. How Improvements in Exchange tend to bring us back to Barter 286 

CHAPTER IV. INTERNATIONAL TRADE 

I. The Balance of Trade 291 

II. How the Balance of Accounts is maintained .... 298 

III. The Advantages of International Trade 301 

IV. Why International Trade necessarily is detrimental to Some 

Persons .......... 307 

V. The History of Protectionism ....... 310 

VI. The Doctrine of Protection 318 

VII. The Doctrine of Free Trade 331 

VIII. The Relative Importance of Foreign and Domestic Commerce . 346 

IX. Some Moderate Forms of Protection 350 

X. Commercial Treaties ......... 353 



Xll 



CONTENTS 



CHAPTER V. CREDIT 

PAGE 

I. Credit is only an Extension of Exchange . 356 

II. The History of Credit . .359 

III. Can Credit create Capital ? 363 

IV. The Function of Banks . . - . . . . . .367 

V. Deposits . 368 

VI. Discount 370 

VII. The Issue of Bank Notes 375 

VIII. Differences between Bank Notes and Paper Money . . . 378 

IX. The Rate of Exchange 380 

X. A Rise in the Rate of Discount 388 

XI. Some Special Forms of Credit 393 

§ 1. .Land Credit 393 

§ 2. Agricultural Credit .395 

§ 3. People's Banks . . . . . . . . 396 

§ 4. Building Associations ....... 397 

XII. Free Banks . .399 

XIII. The Organization of Banks .402 



BOOK IV. DISTRIBUTION 
PART I. THE VARIOUS SYSTEMS OF DISTRIBUTION 

CHAPTER I. THE PRESENT SYSTEM 

I. How the Distribution of Wealth is effected .... 421 

II. Why this System of Distribution does not seem Just . . 423 

III. The Origin of the Right of Property 428 

IV. The Evolution of the Right of Property with Regard to its Object 430 
V. The Evolution of the Right of Property with Regard to its 

Attributes 432 

VI. The Inequality of Wealth ' . . .437 

VII. The Right to be Idle 444 

VIII. The Right to Relief .447 



CHAPTER II. THE SOCIALISTIC SYSTEMS 



I. Equal Sharing . 

II. Communism . 

III. Saint-Simonism and Inheritance 

IV. Collectivism . . 
V. Cooperation . 



455 

459 
464 

467 

478 



CONTENTS 



XI 11 



PART II. THE VARIOUS KINDS OF INCOME 



CHAPTER I. WAGES 

I. Definition of Wages 

II. History of the Wage System 

III. The Laws of Wages .... 

§ 1. The Wages Fund Theory 

§ 2. The Iron Law of Wages 

§ 3. The Theories of the Productivity of Labor 

IV. The Increase of Wages 
V. The Hours of Labor .... 

VI. Trades Unions 

§ 1. Strikes ..... 
§ 2. Arbitration and Conciliation . 
VII. Workingmen's Insurance . 
VIII. The Future of the Wage System 



PAGE 

487 
488 
492 
497 
501 
505 
514 
521 
528 
535 
537 
539 
546 



CHAPTER II. INTEREST 

I. The Ownership of Capital . 

II. The Legitimacy of Interest 

III. History of Loans at Interest 

IV. The Laws of Interest .... 
V. Does the Rate of Interest tend to fall ? 



553 
556 
563 
568 

577 



CHAPTER III. THE RENT OF LAND 

I. The Law of Rent 

II. The Unearned Increment of Land 

III. The Legitimacy of the Rent of Land 

IV. The Evolution of Property in Land 
V. The Hire of Land 

VI. Plans for nationalizing the Land 

VII. The Subdivision of Property in Land 



582 
590 
593 
600 
606 
614 
620 



CHAPTER IV. PROFITS 

I. The Nature and Definition of Profits 

II. The Laws which determine Profits 

III. The Legitimacy of Profits . 

IV. Profit-sharing .... 
V. Productive Cooperation 



623 
627 
632 
642 

648 



XIV CONTENTS 

BOOK V. CONSUMPTION 

PAGE 

I. The Nature and Laws of Consumption 655 

II. Whether Production will always keep Pace with Consumption . 666 

CHAPTER I. SPENDING 

I. Whether Spending helps Business 670 

II. Luxury 673 

III. Consumers' Associations 677 

IV. The Cost of Housing 681 

V. Absenteeism 685 

CHAPTER II. SAVING 

I. The Conditions necessary for Saving 688 

II. Institutions to facilitate Saving ....... 692 

III. The Social Utility of Saving 694 

IV. Investment ........... 697 

INDEX 701 



1 



PRINCIPLES OF POLITICAL ECONOMY 



BOOK I. GENERAL NOTIONS 

I. The Object of Political Economy 

The heavenly bodies, the earth that we inhabit, the ele- 
ments that it contains, as well as the animals and plants 
that live on its surface, — in fact, all the things that con- 
stitute the material universe and all the phenomena that 
take place therein, — are the subjects of a distinct group of 
sciences known as the physical and the natural sciences. But 
in this vast world there are other subjects no less worthy of 
study, namely, men themselves, living in society ; in fact, they 
could not possibly live otherwise. The relations that unite 
men socially form the subject of a separate group of sciences, 
called the social sciences. As there are among men many 
kinds of social relations, — moral, legal, economic, political, 
religious, and, finally, linguistic relations which serve as a 
vehicle for all the others, — so there are many distinct social 
sciences, known as ethics, law, political economy, politics, 
the science of religions, and the science of languages. 1 

It is true that the lines of demarcation among the social 
sciences, which all treat ultimately of man as a member of 
society, cannot be drawn so sharply as those that separate 
sciences having dissimilar subjects, such as geology, botany, 
and zoology. Hence the classification of social sciences will 

1 We do not mention history in this list, because history has no distinct 
subject-matter of its own. Every social science, and even every natural 
science, has its history, which is the study of the same class of facts from 
the standpoint of their succession in time. 

1 



2 PRINCIPLES OF POLITICAL ECONOMY 

always be more or less artificial, made to facilitate study and 
to help overcome the limitations of our understanding rather 
than to indicate any natural separation of them. 1 Indeed, 
the frontiers of these sciences, especially of those most closely 
related to each other, — ethics, jurisprudence, and politi- 
cal economy, — will always be somewhat indefinite; some 
institutions, as, for example, property, inheritance, and the 
wage system, fall clearly within the scope of all three. This 
fortunate interdependence, moreover, is helpful to each of 
these sister sciences. We need only observe that the same 
subject may be studied from distinctly different points of 
view, and bear in mind the dissimilar standpoints of the 
moralist, the lawyer, and the economist. This is not diffi- 
cult . To do our duty, to exercise our rights, to satisfy our 
wants, are three quite different aims of human activity ; and 
only the last of these is the proper subject of economic 
science. We may say, therefore, that political economy has 
to do with the relations of men living in society, so far as 
these relations tend to satisfy the wants of life and concern 
the efforts made to provide for all that is generally under- 
stood by material welfare. 2 

At present there is a tendency to divide the science into 
two studies, pure political economy and social economics, which 

1 Auguste Conite considered it irrational to separate the sciences that 
treat of human societies. He maintained that there should be hut one social 
science, covering all the aspects of social life, and to this science he gave the 
name "sociology," which has since become classical. He expressly con- 
demned every effort to make political economy a distinct science. It is 
in one sense true that all social sciences partake of the unity of human 
nature, but in the light of good scientific methods we cannot gainsay the 
right to keep the above-named social sciences apart as distinct fields of study. 

2 Formerly it was customary to say (and it is often said to-day) that 
political economy is the "science of wealth." But this definition has the 
disadvantage of turning attention away from the real subject of economics, 
which is man and his wants, and concentrating it on exterior objects which 
are only means for the satisfaction of human wants. This is not a mere 
question of words, for the erroneous point of view has exposed many econo- 
mists to the justifiable reproach of reasoning as though man were made for 
wealth, and not wealth for man. 



NATUKAL LAWS 3 

differ less in their content than in the manner of approach- 
ing the subjects they both treat. 

On the one hand, pure political economy (sometimes called 
abstract economics or simply economics) is supposed to in- 
vestigate those relations that arise naturally among men 
living together, just as though we were studying the rela- 
tions among material lifeless bodies of any kind — what 
Montesquieu called "the necessary relations which result 
from the nature of things." It does not undertake to pass 
judgment on these relations from either the moral or the 
practical standpoint, but attempts simply to explain what 
these relations are. In this respect it may be said to re- 
semble any natural or exact science, since it endeavors to 
explain matters just as they happen to be, without question- 
ing their desirability or undesirability. 

On the other hand, social economics is supposed to study 
chiefly the voluntary relations which men have established 
among themselves in the form of social organizations, written 
laws, customs, or other institutions having for their object 
the improvement of social conditions. It purposes to inves- 
tigate and devise means by which better conditions may be 
attained. Hence it is more closely allied to the moral 
sciences-. 1 

II. Whether there are Natural Laws in Political Economy 

When we grant to any branch of human knowledge the 
name of science, our object is not the simple bestowal of an 
honorary title. We mean that the facts with which it deals 
are connected by certain necessary relations which have been 
discovered, and which are called laws. 

1 The division here made must not be mistaken for that which distinguishes 
theoretical from applied or practical economics. Political economy always 
comprises a practical part which takes up the best means of utilizing the 
natural laws discovered by the science ; i.e. such means as banks, railroads, 
monetary and commercial systems, taxes, etc. Social- economics, on the 
other hand, since it seeks to determine what ought to be, i.e. the relations 
which should in justice prevail among men, always embraces a theoretical part. 



4 PRINCIPLES OP POLITICAL ECONOMY 

In some domains the regularity of occurrences is so obvious 
as to attract the attention even of persons least accustomed 
to scientific speculation. A mere glance at the firmament 
is enough to show the regular nightly progress of the stars, 
the monthly succession of the phases of the moon, and the 
annual journey of the sun through the constellations. In 
the most remote days of history, shepherds watching their 
flocks and sailors steering their vessels discovered the peri- 
odicity of these movements, and thus paved the way for a 
true science, the oldest of all sciences, — astronomy. 

The changes that take place in the constitution of inor- 
ganic matter and organic bodies are not so simple as this, 
and the uniformity of their coexistence and succession is 
not so easy to comprehend. Many centuries, therefore, had 
to elapse before the human mind, bewildered by the com- 
plexity of things, succeeded in laying hold of the guiding 
thread, in finding law and regularity in these phenomena 
as well, and thus in establishing the sciences of physics, 
chemistry, and biology. Little by little the idea of a 
permanent regularity of phenomena has penetrated all 
domains of human knowledge, even those which at first 
seemed destined to remain forever closed to it. Even 
the winds and waves, which, from time immemorial, poets 
have made the emblem of inconstancy and capriciousness, 
have been brought under the sway of universal law. The 
great laws which govern currents of air and of water have 
been discovered, and , now form the basis of meteorology. 
Even the chances of wagers, the probable combinations of 
numbers in a throw of dice, have been subjected to cal- 
culation. Hazard itself may henceforward be said to have 
its laws. 

The time was of course bound to come when the great idea 
of a natural order of things, after having step by step success- 
fully invaded all other fields of knowledge, should at last 
penetrate the domain of social facts. The honor of having 
first recognized and proclaimed the existence of a " natural 



NATURAL LAWS 5 

government " of society is due, as we shall see, to Montes- 
quieu and the Physiocrats. 

Yet there are many who hesitate to put the social sciences 
on a level in this respect with the physical sciences. It 
seems to them that there is between these two classes of 
sciences an insurmountable barrier, and that the latter 
belong to the realm of inexorable Necessity, while the 
former belong to the realm of Liberty. They believe that 
the physical sciences have to do with matters that cannot 
help taking place, while the social sciences are concerned 
with things that may or may not take place, according as we 
choose. In the physical sciences, the savant can always 
foresee exactly what fact will succeed or accompany another 
given fact. Thus the astronomer can announce a thousand 
years in advance the exact minute when an eclipse will take 
place. The chemist combining two substances in a crucible 
knows just what compound will result and what its proper- 
ties will be. The same power enables the geologist to 
enumerate the various strata that will be encountered in 
piercing a tunnel or in sinking a mine-shaft. But, it is 
asked, can the economist, the historian, and the statesman tell 
us anything in advance concerning social and political 
events ? Is it not true that, at the most, they can but 
venture conjectures which are as often as not discredited by 
actual occurrences? Prophecy or prevision may sometimes 
be possible to the intuitive mind of a genius, but in the 
social sciences scientific prediction is impossible. 

The above argument is based on a twofold error, regard- 
ing the meaning of the expressions " natural law " and " free 
will." We are in the habit of representing natural law 
figuratively as an inflexible, unchangeable power, command- 
ing unconditional obedience. But natural law is really 
nothing more than the expression of certain relations which 
arise spontaneously among things or among men. These 
relations may, to be sure, be called necessary ones, but 
only when certain foregoing conditions are fulfilled. Atoms 



6 PRINCIPLES OF POLITICAL ECONOMY 

of hydrogen and oxygen do not necessarily produce water ; 
but if one atom of oxygen is placed in contact with two 
of hydrogen under certain conditions of temperature, press- 
ure, etc., they will form water. Similarly, men are not 
obliged to buy and sell, but if a man disposed to sell meets a 
man disposed to buy, and if their offers are mutually accept- 
able^ they will necessarily make a transaction at a price 
which may be determined ; and this transaction will be none 
the less a free contract. 

Free will is commonly understood to mean the power to 
do just as one pleases, without cause or reason. To act 
without an appreciable cause, however, is, as a little reflec- 
tion will show, precisely what a madman does. The conduct 
of every reasonable man is determined by motives, and 
there are always sufficient causes, known or unknown, for 
his actions. 1 

Even those practical people who most vehemently deny 
that economists can foretell happenings in the economic world 
constantly employ the art of prevision in the ordinary course 
of their lives, and in the management of their everyday 
affairs. Every one who speculates — and who is there that 
does not speculate to some extent — resorts to prediction 
after his own fashion. The financier who purchases shares 
in a railroad company foresees, or thinks he foresees, the pro- 
gressive increase of traffic along a certain line ; and the high 
price he pays for these shares indicates (whether he wills or 
not) his firm confidence in the permanency and validity of 
an economic law. It is evident, however, that everybody 

1 Renouvier, in his " Classification des Systemes Philosophiques, 1 ' has called 
attention to the fact that even if the conduct of men were the result of acci- 
dent, pure and simple, rational prevision and prophecy could readily take 
place within the limits we have indicated, because the mathematical doctrine 
of probabilities enables us to foretell, for instance, how often a given number 
will come out in a game of roulette. How much more ought it to be possible, 
therefore, to foretell the conduct of rational beings ! If we had to do with 
men infinitely wise, it is probable that the prevision of human conduct would 
become as infallible as the prescience of the movements of heavenly bodies. 



THE FORMATION OF ECONOMIC SCIENCE 7 

who travels, or sends goods by this railroad, does so only 
because he chooses to do so, i.e. because he wills to do so. 

Without doubt, economic prophecies are often shown to be 
false by subsequent events. 1 But if our previsions in polit- 
ical economy are uncertain, and do not penetrate far into 
the future, the reason for this must not be sought in the 
play of free will, but simply in our ignorance of the causes 
at work, — just as in meteorology, for instance. Every 
thinking man is sure that wind, rain, hail, and storms are 
not the result of mere chance ; he does not for a moment 
doubt that they are governed by natural laws. Yet pre- 
visions in this domain are by no means more accurate than 
in the domain of economics. A commercial crisis can be 
foretold a much longer time in advance than the coming 
of a cyclone ; the trips of a railroad train between two 
cities are certainly less variable than the tides of streams, 
despite the fact that the former are regulated by man, and 
the latter determined by the forces of nature. 

III. The Formation of Economic Science 

In a French book by Antoine de Montchretien, entitled, 
"Traicte de l'CEconomie Politique," the science of political 
economy in 1615 first received the name now applied to it. 
The word economy, or economics, was, however, already in 
use before that date, and one of the books of Xenophon even 
bears this word as a title. But for the ancients it meant 
what we may call domestic economics, or household economy 
(ol/co?, household, and voijlos, law or rule). The qualifying 
adjective, political, indicated that the science had to do, not 
with the economy of the household, but with that of the body 

1 As an argument against the existence of natural laws in social matters, 
the fact is adduced that many things do not take place in the way foreseen. 
But what does this prove save our ignorance ? Think, on the other hand, 
how often things fail to happen as willed or desired ! Does not this demon- 
strate that there are stronger forces at work in the world than the will or 
desires of men ? 



8 PRINCIPLES OF POLITICAL ECONOMY 

politic, or the nation. This new designation arose at a time 
when an important historical transformation was taking place : 
the establishment of the great modern states of Europe. To- 
day, as we have already said, the name social economics is 
often used in place of political economy ; and although the 
etymological meaning of these words is exactly the same, 
the* adjective political is preferable because, like economy, 
it is of Greek origin. At present, however, these terms 
have a different meaning, which we have already explained. 

Some of the questions which are to-day called economic, 
have at all times attracted the attention of mankind, — such 
questions as money, commerce, and the means by which citi- 
zens and the state may grow wealthy. The mediaeval church 
fathers condemned luxury, the inequality of fortunes, and 
loans at interest. The authors of antiquity, Aristotle among 
others, carefully analyzed the nature of money, the separation 
of trades, and the methods of acquiring property. But they 
failed to perceive the bond that unites these different prob- 
lems. They did not conceive the possibility of making these 
matters the object of a completely distinct science, and re- 
garded them rather as the accomplishments of a philosopher 
than as the equipment of a scientist. Whatever was pro- 
posed regarding these matters was offered in the form of, 
good advice to sovereigns and individuals, not as the firm 
results of an established science. 

The discovery of America gave the first impetus to the 
development of a true economic science in the course of the 
sixteenth and seventeenth centuries ; what had previously 
been mere incoordinate advice took the shape of a composite, 
coordinate, logical system of doctrines. Countries like 
France, Italy, and England, seeing with envious eyes how 
Spain was becoming wealthy by means of her mines in the 
New World, sought to discover how they too might procure 
gold and silver. This was precisely the title of a book 
published by an Italian, Antonio Serra, in 1613 (before that 
of Montchretien), viz., " A Brief Discourse on the Possible 



THE FORMATION OF ECONOMIC SCIENCE 9 

Means of causing Gold and Silver to abound in Kingdoms 
where there are no Mines." It was believed that this means 
consisted in the sale abroad of manufactured products ; and, 
with this purpose in view, efforts were made to develop 
foreign trade and home manufactures by an elaborate, com- 
plicated, and vexatious system of regulations to which the 
name mercantile system has generally been applied. 

A strong reaction against these doctrines took place in the 
middle of the eighteenth century, especially in France. At 
this time the uppermost thought in the minds of people 
seemed to be a return to the " state of nature," and the 
repudiation of all artificial arrangements. All the literature 
of the eighteenth century is impregnated with this feeling. 
Its influence is manifest in the political science of the period, 
and in the writings of Rousseau and Montesquieu. Montes- 
quieu's book on the " Spirit of Laws " begins with the 
immortal phrase, " Laws are the necessary relations result- 
ing from the nature of things; " and in the preface of the same 
work he declares, " I have not drawn my principles from 
my prejudices, but from the nature of things." 

It was then that economic science really began. In 1758, 
one of the physicians of the French king Louis XV, named 
Quesnay, published his " Tableau Economique." * A group 
of eminent men soon became his disciples and adopted the 
name of physiocrats 2 or economists. The physiocratic school 
introduced two new ideas in economic science, — ideas that 

1 In 1755 Cantillon had published his " Essai sur la Nature du Com- 
merce," written as early as 1725. This book has recently been brought to 
light again by English economists, and is by one of them designated as the 
first methodical treatise on political economy. The work, however, was 
generally unknown, and has exerted an influence on the development of the 
science only through the physiocrats, who were familiar with it, and bor- 
rowed much from its contents. 

2 Physiocracy is composed of two Greek words meaning the "government 
of nature." One of the most illustrious disciples of this school, Turgot, not 
only laid down its principles in his remarkable writings, but actually applied 
them during his terms of office as intendant of Limoges and later as min- 
ister to Louis XVI of France ; he decreed the freedom of trade, the abolition 



10 PRINCIPLES OF POLITICAL ECONOMY 

were diametrically opposed to the mercantile system. These 
were : — 

(1) The superiority of agriculture over commerce and 
industry. The physiocrats regarded only the soil as the 
source of wealth, because it alone gives a net product. The 
classes of society other than farmers are sterile classes. 

(2) The existence of a "natural and essential order of 
human societies " — these very words form the title of a book 
written by one of the physiocrats, Mercier de la Riviere — 
which we should learn to recognize, and to which we should 
strive to conform. They therefore declared that it is useless 
to devise laws, regulations, and systems, when all that we 
need do is to let things alone. 

The first of these principles, although it brought al>out a 
fortunate reaction against the errors of the mercantile sys- 
tem, was partly erroneous, or at least exaggerated ; and the 
error or exaggeration led to the destruction of the new 
school. The second principle, on the other hand, served 
during nearly a century as the foundation of the whole 
edifice of political economy.. And it is true that facts in 
themselves cannot form the basis of a science unless we have 
discovered that they are bound together by relations of cause 
and effect, — that they form an " essential and natural 
order." 

The publication in 1776 of " An Inquiry into the Nature 
and Causes of the Wealth of Nations " by a Scotch professor, 
Adam Smith, marks an era in the history of political econ- 
omy. During nearly one hundred years this book has 
assured the unquestioned preeminence of the English school 
of economists. It procured for its author the title, not fully 
deserved, of " father of political economy." 

Adam Smith rejects the first physiocratic principle and 
gives industry its legitimate place in the creation of wealth. 
But he confirms and develops most brilliantly the second 

of interior duties and the tariff on wheat, and the liberty of labor (by abol- 
ishing trade corporations or guilds). 



THE FORMATION OF ECONOMIC SCIENCE 11 

tenet, i.e. the existence of natural economic laws, and the let- 
alone policy, at least as a rule of practical conduct. He 
was, moreover, much superior to the physiocrats in ob- 
serving facts and in profiting by the lessons of history. 
His studies extended over nearly the whole field of eco- 
nomic science, which has scarcely been enlarged since his 
time. 

Only a short while after Adam Smith, three economists 
came forward almost simultaneously with theories that have 
occupied the minds of men for half a century. Two of 
these economists were Englishmen. The first, Malthus, is 
the author of a celebrated theory concerning the increase of 
population, 1 which, although it concerned a matter of a 
somewhat special nature, was destined to have a great influ- 
ence upon the whole science of economics. The second was 
Ricardo, 2 quite as celebrated because of his theory of the 
rent of land, but whose misuse of the abstract and purely 
deductive method of investigation later gave rise to a 
vigorous reaction. The third author of this group was a 
Frenchman, Jean Baptiste Say, 3 whose " Traite d'Economie 

1 The Rev. Thomas R. Malthus first published his book anonymously in 
1798 under the title, " An Essay on the Principle of Population as it affects 
the Future Improvement of Society." The Essay passed through six edi- 
tions in the author's lifetime, and in each of them he introduced various addi- 
tions and corrections. Although the last edition is dated 1826, that of 1817 
is the last that was fully revised by the author, and presents the text sub- 
stantially as it has since been reprinted. A cheap edition is published by 
Ward, Lock & Co. (1890). A good selection of chapters from the book is 
contained in the "Economic Classics" edited by Professor W. J. Ashley, 
and published by the Macmillan Co. The student of Malthusian theories 
should consult James Bonar's "Malthus and his Work" (London, 1885) 
and a keen criticism of the Malthusian theory of population by Dr. Frank 
Fetter, " Versuch einer Kritik der Malthus'chen Bevoelkerungslehre " 
(Jena, 1895). 

2 David Ricardo's principal work is the " Principles of Political Economy 
and Taxation." The first edition appeared in 1817; the third, with many 
additions, in 1821. The best edition now in use is probably E. C. K. Gon- 
ner's, published in the " Bohn Library," London, 1891. 

3 Say's book has been translated into English by C. R. Prinsep, who pre- 
pared a so-called "Fourth American Edition" in 1830 under the title "A 



12 PRINCIPLES OF POLITICAL ECONOMY 

Politique," published in 1803, is remarkable for its clear 
style, its systematic arrangement and logical classification, 
rather than for depth of thought. Translated into all the 
languages of Europe, this book was the first truly popular 
treatise on political economy, and has served more or less 
frequently as a model for the innumerable well-known man- 
uals of economics that have been written since then. 

It was particularly Say's book that set forth clearly (with 
some exaggeration, but an exaggeration that was salutary at 
that formative period of the science) the prevailing concep- 
tion of political economy as a natural, purely expository 
science. Adam Smith had defined economics as "proposing 
to enrich both the people and the sovereign," thus giving a 
practical aim and purpose to the study. But Say, amending 
this definition, writes, " I had rather say that the object of 
political economy is to make known the means by - which 
wealth is produced, distributed, and consumed," and he 
named his book accordingly. 1 

Thus political economy was firmly established in its classi- 
cal form. From this time on, there arose a large number* of 
" schools " whose differences of opinion we shall now briefly 
indicate. 2 

Treatise on Political Economy, or the Production, Distribution and Con- 
sumption of Wealth." 

1 "TraitS d'Economie politique ou simple exposition de la maniere dont 
se forment, se distribuent et se consomment les richesses." 

2 The best-known general histories of political economy are : — 
Ingram, "A History of Political Economy." Written from the stand- 
point of an adherent of the "historical" school. 

Blanqui, " History of Political Economy in Europe." Rather a history 
of economic policies than of economic theories and doctrines. This book, 
moreover, is not up to date, but does contain good chapters on antique, 
mediaeval, and early modern economic systems. 

Cohn, " History of Political Economy." Supplement to the Annals of 
the American Academy of Political and Social Science, Philadelphia, 1894. 

Cossa, " An Introduction to the Study of Political Economy." London, 
1893. This book contains an • Historical Part giving extensive biographical 
and bibliographical notices. It is, however, scarcely a book for beginners, 
besides being a poor translation of the Italian original. 



DIFFERENCES OF OPINION CONCERNING METHOD 13 



IV. Differences of Opinion concerning Method 1 

In scientific language the term " method " is used to desig- 
nate the road that must be followed to lead to the discovery 
of truth. 

The classical school of economics, especially as represented 
by Ricardo, preferred to employ the deductive method. This 
method starts from certain general data that are conceded to 
be beyond dispute, and then by way of ratiocination pro- 
ceeds to deduce an infinite series of propositions. Geometry 
may be taken as a type of the sciences that employ the 
deductive method. Law students will readily recognize that 
law itself, particularly Roman law, employs the deductive 
method ; the Roman jurist, starting from a few principles 
laid down by the Twelve Tables or found in the jus gentium, 
proceeded to construct that huge monument of learning 
called the Pandects. Similarly, in economic science, the 
classical school began with the celebrated axiom that " man 

Eisenhart, " Geschichte der National-Oekonomik." Second edition, Jena 
1891. Probably the most available of German histories, very suggestive and 
deserving English translation. 

Moritz Meyer, "Die neuere Nationaloekonomie." A brief but good 
account of economic science since Adam Smith, with special reference to the 
historical and socialistic tendencies. 

Espinas, " Histoire des Doctrines Economiques." Paris, Colin & Cie. 
An excellent little history for the period of Adam Smith and preceding 
epochs, but entirely inadequate for those that follow. 

Price, "A History of Political Economy in England" is a convenient 
little volume on the history of English economic theories. 

Boseher, "Geschichte der National-Oekonomik in Deutschland " is typi- 
cal of the thoroughness and erudition of the author, one of the foremost Ger- 
man economists of the historical school. 

Block, " Les Progres de la Science Economique depuis Adam Smith." 
Second edition, two volumes. This book, written by a man who had charge 
of the book-reviewing department of the French " Journal des Economistes," 
from the " classical " point of view, is not chronologically arranged, but 
divided according to doctrines, — each doctrine being considered separately 
in the changes that it has undergone since Adam Smith. 

1 A fine discussion of methods will be found in Keynes, " Scope and 
Method of Political Economy." Macmillan, 1891. 



14 PRINCIPLES OF POLITICAL ECONOMY 

always seeks to obtain a maximum of satisfaction with a 
minimum of trouble " and a few other principles, such as the 
law of the diminishing returns of land, and thence deduced 
a series of corollaries that still constitute the framework of 
economic science. 

A new school, called historical, or realistic, employs and 
recommends the inductive method, — the method that Bacon 
introduced in the physical and the natural sciences a few cen- 
turies ago, and which has given such marvellous results. It 
starts from the observation of certain definite facts, and bases 
its general propositions upon these observed facts. For ex- 
ample : the fact that all bodies fall, leads to the law of gravi- 
tation. In the field of economics this method consists in the 
patient and accumulated observation of all social facts as they 
are revealed to us, whether in the present by means of statis- 
tics or information supplied by travellers, or in the past by 
means of history. 

Indeed, history, by informing us how economic and social 
institutions arose, and how they have been transformed, is 
peculiarly fitted to throw light upon the true character of 
social facts. 1 

Now institutions studied from the historical point of view 
are known to differ considerably from nation to nation, and 
from time to time within one and the same country. The 
twofold characteristic of universality and permanency, which 
the classical school attributed to economic phenomena, and 
to which it gave the pompous name of " natural law," thus 
vanishes into thin air. We no longer attempt to discover 
general laws governing abstract man, but historical laws 
governing the relations among men living in a given nation 
at a given epoch. For this reason the name " national " is 
sometimes applied to this school of political economy. 

1 The historical school of economics, like the historical school of jurispru- 
dence founded by Savigny, first arose in Germany. It may be said to date 
from the publication of Professor Roscher's treatise on political economy in 
1854, although books by Professor Hildebrand (1848) and Professor Knies 
(1853) decidedly manifested the same point of view, 



DIFFERENCES OF OPINION CONCERNING METHOD 15 

The method just described is safer than the other, since it 
abstains from all sweeping generalizations. But is it as fruit- 
ful ? Probably not. It is indeed a delusion to suppose that 
the use of the purely inductive method can ever be as effica- 
cious in the social sciences as in the physical and the natural 
sciences. There are two reasons for this. First, because the 
observation of facts is more difficult in the social sciences. 
Although at first it may seem paradoxical to declare that it 
is harder to observe facts that concern us so closely as these, 
and in regard to which we are not only spectators, but actors 
also, yet this is the very reason which keeps us from seeing 
them clearly ! Furthermore, social facts are infinitely more 
diversified ; whoever has seen one grasshopper may be said 
to have seen them all ; but whoever has seen one miner 
cannot be said to know very much about the condition of 
mining laborers. In reality, the observation of economic 
and social facts is a task far beyond the capacities of any 
single person, and one which can only be accomplished by 
the collective labor of thousands who unite the results of 
their observation, or of states employing for this purpose 
the potent means of investigation which governments have 
at their disposal. 1 Joint observations of this sort have been 
made the object of a distinct science called statistics. 

The mere observation of facts, moreover, would never have 
given the marvellous results obtained in the natural sciences, 
were it not for the help of a particular method of observation, 
used under prearranged circumstances and called experi- 
ment. But in the social sciences experiments are difficult, 
if not impossible. The chemist, the physicist, and even the 
biologist (although the latter encounters greater difficulties) 
can always take a single fact, which he wants to study, and 

1 One of the most elementary of social facts is assuredly the population of 
a given group. Yet is it not evident that a single observer is almost power- 
less to ascertain this fact ? Only our governments are in a position to under- 
take successfully such a task ; and only very recently have even our official 
censuses attained a tolerable degree of accuracy. 



16 PRINCIPLES OF POLITICAL ECONOMY 

subject it to artificially determined conditions which may be 
varied at will. In order, for instance, to study the breathing 
of an animal, he can place it under the bell-jar of an air- 
pump, and regulate the air-pressure exactly to suit the re- 
quirements of the experiment. But the economist, even 
though he be also a law-giver or an omnipotent despot, does 
not possess this power to experiment at will. The reasons 
for this are as follows : — 

(1) He cannot make prearranged experiments unless he 
has at his service an all-powerful despot. Consequently, 
instead of directly arranging social experiments, he is 
obliged to wait for experiments to take place of their own 
accord, as it were ; a fortunate hazard may thus under 
certain peculiar circumstances provide experiments worthy 
of study. The application, for instance, of a new law, 
or the founding of a socialist colony, or the occurrence 
of an abnormal social crisis, may furnish the economist with 
the nearest approach to an experiment in the strict sense of 
the word. 

(2) Furthermore, and for the same reason, the econo- 
mist is obliged to study facts just as they happen to occur, 
without being able to isolate any of them from the mass of 
other connected facts with which it is interwoven. 

Suppose we want to study the effects of free trade. Sup- 
pose, too, that we could take two countries, place them, as it 
were, under a bell-jar during a sufficiently long period — 
say half a century — and subject one of them to a regime of 
absolute free trade and the other to a system of protection. 
Now, at the end of fifty years, if we should find that the 
first country had grown wealthy and the second had been 
ruined, would the problem of free trade thereby be solved ? 
By no means ! The experiment, to be sure, would furnish 
valuable information ; but a large number of causes other 
than the difference of commercial policy — such as different 
natural environment, racial differences, differences in the 
prevailing legal institutions or in the energy of the people 



DIFFERENCES OF OPINION CONCERNING METHOD 17 

— may also explain the different results of the experiment 
in these two countries. 1 

The new school, therefore, in ridiculing the procedure and 
methods of the deductive school, is too pretentious and not a 
little ungrateful. For, after all, the new school employs the 
same categories of thought as the old school. It has not 
remade economic science ; it has only introduced into it a 
new spirit. This is, to be sure, an achievement of which it 
may well be proud. The historical school has itself given 
rise to much criticism, inasmuch as, by dint of devoting its 
attention to the observation of facts and of those variations 
in economic phenomena that arise from time to time and 
from nation to nation, it shows too strong a tendency to 
fall into erudition, and to lose sight of those permanent and 
fundamental causes which everywhere determine economic 
phenomena. It incurs the risk of remaining purely descrip- 
tive. If we were required to give up the attempt to 
discover permanent relations and general laws, working 
themselves out under the changing manifestations of eco- 
nomic life, then we should be compelled forever to renounce 
the hope of building up a science of political economy. 
Howsoever dangerous for the science far-reaching hypoth- 
eses may be, they are infinitely less so than the confession 
that there is no uniformity underlying economic life in all 
places at all times. No matter how justified, from certain 
points of view, the ridicule may be that has been aimed at 
the abstract man — the economic man — of the classical 
school, 2 we must nevertheless admit that there are certain 

1 Two Australian colonies, New South Wales and Victoria, have a com- 
mon origin and the same natural environment. The first of these is subject 
to a system of free trade, while the second pursues a policy of protection. 
Although this experiment has lasted a long time, it cannot be said that it 
has solved the problem of protection versus free trade. Adhuc sub judice lis 
est. 

2 The classical school regarded man from the exclusively economic point of 
view and assumed that his conduct is generally determined by intelligent 
self-interest or egoism. The adversaries of the school insist that this assump- 



18 PRINCIPLES OF POLITICAL ECONOMY 

general characteristics possessed by all mankind. The best 
proof of this may be found in history itself, which teaches 
that wherever human societies are placed under analogous 
conditions the same social types have been evolved. Feudal- 
ism in Europe in the twelfth century, and in Japan until the 
nineteenth century ; the successive forms of property and 
marriage ; the simultaneous employment of precious metals 
as money ; identity of funeral rites ; and even the uniformity 
of fairy tales, some of which, according to modern folk-lore, 
recur in a more or less identical form among a large number 
of different peoples of the earth ; — all these facts exemplify 
the fundamental identity of human nature the world over. 

Therefore we cannot reject absolutely the abstract method, 
nor the "let Us suppose " so dear to the school of Ricardo and 
so obnoxious to the historical school, nor even the fictitious 
stories (mockingly called " Robinsonades ") of isolated indi- 
viduals used to illustrate economic principles. The laby- 
rinth of economic facts is far too complex and entangled for 
us ever to be able to see clearly through it by the aid of obser- 
vation alone, and to distinguish those fundamental relations 
which constitute the subject-matter of every science. 1 To 
bring light into darkness, and order out of chaos, we must 
make use not only of abstraction but also of imagination, 
i.e. of hypothesis. The proper method of economic investi- 
gation proceeds by three stages : — 

tion involves three errors : (a) that man has no other than economic motives 
and interests ; (5) that man knows always what is best for him ; and (c) that 
.he will always do what his intelligent egoism dictates. As the critics of the 
school regard these three assumptions as false, they claim that the economic 
science built upon them is necessarily erroneous. They maintain that the 
"economic man," whose sole preoccupation is the accumulation of wealth, 
whose exclusive motive is economic egoism, and who knows what that egoism 
dictates, is an unreal fabric of the economist's brain. 

1 Chevreuil declared that "every fact is an abstraction." Although this 
dictum seems a strange one at the first glance, yet it is easily understood if 
we but consider that what we call a fact is previously something which has 
had to be separated out of a host of other connected facts, and for the ob- 
servation of which abstraction has had to be made of many other things. 



DIFFERENCES OF OPINION CONCERNING METHOD 19 

(1) Observing facts, without any preconceived notion, — 
especially those facts that at first seem most insignificant. 

(2) Imagining a general explanation which will enable us 
to establish between two groups of facts the connecting link 
of cause and effect ; in other words, by formulating an 
hypothesis. 

(3) Verifying this hypothesis by determining, with the 
help of experiment, if possible, or, at any rate, by means of 
specially conducted observations, whether or not the applied 
hypothesis exactly fits the facts it proposes to explain and 
connect. 

The above, moreover, is the procedure employed even in 
the physical and natural sciences. All the great laws which 
form the basis of modern science, from Newton's law of 
gravitation down through the list, are only verified hypoth- 
eses. We may go further than this, and declare that the 
great theories which have served as a basis for the scientific 
discoveries of modern times (e.g. the existence of ether, in 
the physical sciences, and the doctrine of evolution, in the 
natural sciences) are only hypotheses not yet verified. 1 

The mistake of the classical school, therefore, did not con- 
sist in too frequent use of the abstract method, but in having 
too often mistaken the abstraction for the reality. For 
example : After having invented its "economic man," 
prompted solely by egoism (which it had a perfect right to 
do), its error lay in believing in the real existence of such a 
being, and in his existence alone in the economic world. It 

! As Stanley Jevons has observed in his "Principles of Science," the 
method employed for the discovery of truth in the sciences is similar to 
that unconsciously used by those who try to find the meaning of rebuses or 
ciphers on the back pages of some illustrated papers. In order to guess what 
their meaning may be, we imagine some meaning or other. Then we observe 
whether this really agrees with the figures or pictures before us ; if it does 
not, it is an hypothesis to be rejected. We then conceive another one, and 
so forth, until we obtain a more successful result, or lose courage altogether. 
We shall find nothing in facts unless we have previously in our minds an 
image or a forecast of the truth underlying them. 



20 PRINCIPLES OF POLITICAL ECONOMY 

beheld in these abstractions the very foundations of the eco- 
nomic edifice, whereas they represent merely the scaffolding 
necessary for the construction of the building but erected 
only to be done away with when once the work is finished. 
It is not the deductive method, but the dogmatic spirit, that 
we must be careful to avoid. Hence the deductive method 
has not been abandoned. On the contrary, it has recently 
been revived, in a more absolute form than ever, by two new 
schools of economic thought. 

The first of these is the so-called mathematical school. 1 
This school considers the relations which arise among men 
in any given circumstances as relations of equilibrium, like 
those which are studied in mathematical mechanics ; and, as 
in mechanics, this school regards the social economic forces 
as susceptible of being expressed by algebraic formulae. To 
accomplish this, a problem must be reduced to a certain lim- 
ited number of factors, excluding all others, just as in mathe- 
matical mechanics. 

The second, or psychological school, also called the Austrian 
school, because of the nationality of its most eminent repre- 
sentatives, 2 devotes its attention almost exclusively to the 
theory of value, which it regards as the foundation of all 
economic science. And as value is, according to this school, 
only the expression of human desires, economic science is 
reduced to a study of human desires and the causes which 

1 This school, it is commonly supposed, was begun in France by Cournot, 
the author of "Recherches sur les Principes Math6matiques de la The'orie 
des Richesses," published in 1838. This book, of which an English transla- 
tion was made by N.T.Bacon, in the "Economic Classics'' (Macmillan, 
New York, 1897), had no success whatever until the subsequent reintroduc- 
tion of mathematical methods in economic science by Jevons, Marshall, and 
Edgeworth in England, by Walras in. Switzerland, Pantaleoni in Italy, Gos- 
sen and Launhardt in Germany, and Irving Fisher in the United States. 

2 Professors Karl Menger, von Boehm-Bawerk, and Wieser. The doctrines 
of this school, which are rapidly gaining ground everywhere, may be found 
summarized in Professor William Smart's "Introduction to the Theory of 
Value." The most prominent American protagonists of the school are Pro- 
fessors J. B. Clark and S. N. Patten. 



DIFFERENCES OF OPINION CONCERNING METHOD 21 

intensify or diminish them ; the result is a very subtle 
psychological analysis. Besides, was not the old classical 
principle (called hedonistic, from a Greek word signifying 
pleasure or enjoyment), which consists in seeking a maximum 
of gratification at a minimum cost of effort, an entirely psy- 
chological principle ? 

It is evident that these two schools carry the deductive 
method to its extreme logical consequences. Nevertheless, 
we must concede that they have not committed the error, 
into which the old deductive school had fallen, of being led 
astray by their own speculations. They do not regard the 
hedonistic principle, or their abstractions, as anything more 
than hypotheses necessary for the establishment of a science 
in the strict sense of the term. 1 

While the abstract and hypothetical method is thus 
revived by the modern mathematical school, Say's natural- 
istic method may also be said to live again in the biologico- 
sociological school, which considers political economy as a 
kind of annex to natural history and biology ; and which, 
regarding human societies more or less as organisms, trans- 
poses physiological laws to the domain of sociology. 2 

But this school, which for a time prospered, has lost much 
of its influence. Many sociologists protest against the com- 

1 In his "Elements d'Economie Politique pure," M. Walras of Lausanne 
writes, "Pure political economy is essentially the theory of the determina- 
tion of prices under a hypothetical regulation of absolutely free competition." 
Pantaleoni, in his " Principii di Economia pura," even declares, "Whether 
the hedonistic and psychological hypothesis (that of the maximum of pleas- 
ure with the minimum of effort) whence all economic truths are deduced, 
coincides or fails to coincide with the motives which actually determine 
men's actions, is a question which in no wise detracts from the accuracy of 
truths deduced therefrom." 

2 This point of view is represented principally by Schaeffle, " Bau und 
Leben des socialen Koerpers"; Lilienfeld, " La Pathologie sociale " ; Rene" 
Worms, "Organisme et Soci6te\" These authors emphasize the following 
ideas : — 

Every organic body is composed of innumerable cells, each having its own 
life and individuality, so that every living being is really only an association 
of millions and billions (more numerous, therefore, than the largest human 



22 PRINCIPLES OF POLITICAL ECONOMY 

parison of society to an organism. Herbert Spencer him- 
self, who most brilliantly developed these analogies in his 
" Principles of Sociology," has protested against the attempt 
to treat living organisms and human societies as similar. 1 

V. The Various Economic Schools of Thought 

Regarding both the right method of study, and the solu- 
tions proposed for economic problems, there is a divergence 
of opinion among economists almost as great as among phi- 
losophers. This is incontestably a sign of inferiority. There 
is little consolation in the fact that political economy is 

societies) of individuals which, as Claude Bernard said, " are united but yet 
remain distinct, like men holding one another by the hand." 

Each organized being is subject to the law of the physiological division 
of labor. In very low organisms all the functions are merged together in a 
shapeless and homogeneous mass ; but as organization is perfected, the 
various functions of nutrition, reproduction, locomotion, etc., become differ- 
entiated, and each comes to possess a special organ. In fact, it may be said 
that the more divided the physiological labor is, the higher is the rank of the 
organism. 

Each living being is the seat of a perpetual movement of exchange and 
circulation, an exchange of services and even of materials; for it is impos- 
sible for a function of the organism to become specialized in one single organ, 
as we have just seen, unless the other parts also fulfil other functions which 
are essential to life, and communicate the ensuing benefits. Herbert Spencer 
remarks that " the entire class of men engaged in buying and selling com- 
modities of all kinds, on large and small scales, and in sending them along 
gradually formed channels to all districts, towns, and individuals, — is along 
with these channels fulfilling an office essentially like that fulfilled in a living 
body by the vascular system." 

Credit itself is as indispensable for the due working of living beings as it 
is for that of social organisms. For, as Herbert Spencer says, " If an organ 
in the individual body or in the body politic [is] suddenly called into great 
action — that it may continue responding to the increased demand, there 
must be an extra influx of the materials used in its actions ; it must have 
credit in advance of function discharged." 

1 Another eminent sociologist, Tarde, has still more energetically broken 
away from this tendency by declaring that "the science of sociology will 
only begin to develop when it has cut the umbilical cord which unites it to 
its mother, biology." But even this is too great a concession, for we do not 
at all regard biology as the mother of sociology. 



THE LIBERAL SCHOOL 23 

scarcely more than a century old, and in the hope that these 
disagreements will disappear in time. Other sciences which 
are no older, and some of which a generation ago were almost 
unknown, have already found it possible to establish a group 
of principles sufficiently well-founded to obtain the almost 
unanimous acceptance of those interested in these sciences. 
We might be justified in hoping for the same agreement 
sooner or later among economists, if the disagreement con- 
cerned only the observation of phenomena and the ex- 
planation of their interrelations. But unfortunately this 
divergence of ideas concerns the very purpose and aim to 
be accomplished, the ideal to be worked for, and the means 
suitable for its realization. It cannot cease, therefore, until 
the moral, political, and social unanimity of mankind is a 
realized fact. 

In contemporaneous economic thought, we may point out 
five schools or tendencies that are clearly distinguishable. 

Section 1. The Liberal School 

The first of these schools is called liberal, because of the 
celebrated formula which for a long time served as its motto : 
" laisser faire, laisser passer." 1 But is it really a " school " ? 

To this insinuation its partisans object with some loftiness, 
and maintain that they represent the science itself. They 
assume, and for the most part receive even from their 
opponents, the simple name of " economists." The begin- 
nings of this school coincide as a matter of fact with the 
origin of economic science itself. The doctrines of the 
school are very simple, and may be summed up in three 
points : — 

1 Its adversaries sometimes call it, ironically, the "orthodox" school. 
In its origin it is directly descended from the physiocrats (one of whose 
predecessors, Gournay, is said to have originated the maxim "laisser faire, 
laisser passer ") and J. B. Say. Its principal representatives in the nineteenth 
century have been Dun oyer, Bastiat, Baudrillart, Courcelle-Seneuil, and 
Leon Say, in France ; Ferrara. in Italy ; Francis Walker, in the United 
States. 



24 PRINCIPLES OF POLITICAL ECONOMY 

(1) Human societies are governed by natural laws which 
we could not alter, even if we wished, since they are not of our 
own making. Moreover, we have not the least interest in 
modifying them, even if we could ; for they are good, or, at 
any rate, the best possible. 1 The part of the economist is 
confined to discovering the action of these natural laws, 
while the duty of individuals and of governments is to strive 
to regulate their conduct by them. 

(2) These laws are in no wise opposed to human liberty; 
on the contrary, they are the expression of relations which 
arise spontaneously among men living in society, wherever 
these men are left to themselves and are free to act accord- 
ing to their own interests. When this is the case, a harmony 
is established among these individual interests which are 
apparently antagonistic ; this harmony is precisely the 
natural order of things, and is far superior to any artificial 
arrangement that could be devised. 

(3) The part of the legislator, if he wishes to insure social 
order and progress, must therefore be limited to developing 
individual initiative as fully as possible, to removing what- 
ever might interfere with such development, and to prevent- 
ing individuals from meddling with one another. Therefore 

The English economists who succeeded the great founders of the science 
have been ironically designated as the Manchester school, consisting of such 
authors as MacCulloch, Senior, Cairnes ; they may be considered as belong- 
ing to the liberal school, except that they are not quite so optimistic as the 
French liberals, but even more dogmatic than they. John Stuart Mill's fine 
book on the "Principles of Political Economy," first published in 1848, is 
the first to manifest any leaning toward socialism. 

Most French economists have remained faithful to the classical or liberal 
school. M. de Molinari is its most ardent disciple, and M. Paul Leroy- 
Beaulieu is probably its most eminent representative in France to-day, where 
the monthly "Journal des Economistes" defends the tenets of liberalism, 
while the " Revue d'Economie politique," edited by Professors Paul Cauwes 
and Charles Gide, inclines to the historical school. 

1 " The laws which govern capital, wages, and the distribution of wealth 
are as good as they are inevitable. They bring about the gradual elevation 
of the level of humanity." — Leroy-Beaulieu, "Precis d'Economio 
politique." 



THE LIBERAL SCHOOL 25 

the intervention of governments ought to be reduced to that 
minimum which is indispensable to the security of each and 
of all, — in a word, to the policy of " let alone." x 

This conception certainly lacks neither simplicity nor 
grandeur. Whatever may become of it in the future, it 
possesses at least the merit of having helped to establish the 
science of political economy ; and if other doctrines are 
bound permanently to take its place, it will, nevertheless, 
remain the foundation on which new theories are built. 

The most serious complaint that can be made against this 
body of teaching is its marked tendency to optimism, which 
appears to be inspired far less by a truly scientific spirit 
than by a desire to justify the existing order of things. 
Undoubtedly, from a consideration of the economic organ- 
ization of a society and of the institutions which are its 
groundwork, the conclusion may be drawn that they are 
beneficial, at any rate in certain aspects ; for the very fact 
of their existence and duration shows well enough that they 
have a value which is at least relative ; further, that they 
are natural is a just conclusion to draw, for they are evi- 
dently determined by the series of previous states which 
produced them. But in no wise can it be inferred that 
they are the best possible ; such a conclusion is altogether 
illogical. 2 

1 " We assert that these natural laws govern the production and distribu- 
tion of wealth in the manner that is most useful, i.e. most conformable to the 
general good of the human species. Observation of these laws, together with 
the smoothing away of natural obstacles which impede their action, and 
especially the prevention of any artificial obstacles, is sufficient to render the 
condition of man as good as is consistent with his acquirements and his industry. 
Our gospel, therefore, is summed up in these four words, ' Laisser faire, 
laisser passer.' " — De Molinari, " Leslois naturelles." 

Bastiat's famous work, the " Harmonies e'conomiques," is nothing but the 
development of similar ideas. 

2 Auguste Comte protested in the name of science against "the systematic 
tendency to optimism, which is clearly theological in origin " (Cours de 
Philosophie Positive, 48th lesson). But this doctrine cannot offer even the 
excuse that it agrees with theology, as Comte supposes ; for Christian theol- 
ogy is nothing less than optimistic. On the contrary, in its eyes the actual 



26 PRINCIPLES OF POLITICAL ECONOMY 

The idea that the prevailing economic order is the sponta- 
neous product of liberty, and that it could be replaced only 
by an order founded on constraint and therefore worse than 
the present one, is not well-founded. The present order of 
things is, at least in part, the result either of w T ar and brutal 
conquest (e.g. the appropriation of the soil of England and 
Ireland by a small number of landlords, originating histori- 
cally in conquest, usurpation, or confiscation), or of legisla- 
tive enactments passed by certain classes of society in their 
own interest (e.g. laws of inheritance, fiscal laws, etc.). 
Therefore, if the world were to be made over again, and if 
it could be rearranged under conditions of absolute liberty, 
there is no proof that it would be at all like the world of 
to-day. 

Nor is it any more legitimate to conclude that because 
natural laws are permanent and immutable, existing eco- 
nomic facts and institutions should also possess this char- 
acter of permanence and immutability. That, too, is a 
sophism, not to say word-jugglery. If, on the other hand, 
as contemporary science shows a tendency to believe, the 
natural law par excellence is that of evolution, then it must 
be conceded that natural laws, far from excluding the idea 
of change, always presuppose it. When it is maintained, 
for example, that the wage-system is bound to disappear, 
because, just as it has succeeded serfdom and slavery, so it 
too will be replaced in turn by cooperation or some other 
system not now nainable, we may, of course, criticise this 
line of argument ; but we cannot maintain that it is con- 
tradictory to natural laws, for these very laws cause the 
same plant to produce, successively, first seed, then flower, 
then fruit. 

Not only do economic facts and institutions change, but 
our will is by no means poiverless to bring about these changes. 
Indeed human will is every day, and in the most efficacious 

order of things and all the manifestations of human liberty are irretrievably 
vitiated by the Fall. 



THE LIBERAL SCHOOL 27 

manner, exercised on physical facts for their modification 
according to our needs. This reasoned human influence on 
natural phenomena is not in the slightest incompatible with 
the idea of natural law. On the contrary, it is closely bound 
up with it. 1 

We need only open our eyes to perceive man's marvellous 
power to modify natural phenomena. Undoubtedly there 
are some facts, which, by reason of their magnitude or 
their remoteness, escape all human influence. Such, for 
example, are astronomical, or geological, or even meteorolog- 
ical phenomena ; we must submit to them in silence ; our 
faculty of prevision cannot enable us to avoid the approach 
of a comet or the shock of an earthquake. But how many 
other domains there are in which our science is almost su- 
preme ! Most of the compounds of inorganic chemistry 
(including the most important ones) have been produced 
by the scientist in his laboratory. When we watch the 
cattle-raiser in his stalls, the horticulturist in his gardens, 
ceaselessly modifying animal or vegetable forms and creat- 
ing new varieties, it seems as if animate Nature herself sub- 
mitted to the process of alteration at our pleasure. Even 
atmospheric phenomena do not entirely escape the power of 
human industry, which makes bold to assert that by clear- 
ances or by new plantations, it can modify the weather, 
and, repeating the miracle of the prophet Elisha, bring down 
rain and dew from heaven whenever it wishes. 

How much truer it is, therefore, that our influence may be 
exerted on economic facts, precisely because they are acts 
performed by man, and because we have immediate control 
over them ! 2 Without doubt, here, as in the domain of physi- 

1 As M. Espinas wittily remarks in his book on " Les Societes animates," 
"If human activity were unable to change the order of things, the act of 
boiling an egg would have to be regarded as a miracle." 

2 Even the representatives of the determinist school, those who go so far 
as to deny free will (and surely the "liberals" cannot be among them), 
recognize that man has the power of modifying the order of things in which 
he lives. They make only the reservation that every modifying act of man 



28 PRINCIPLES OF POLITICAL ECONOMY 

cal phenomena, our influence is confined within certain 
limits that science seeks to determine, and which all men, 
whether acting individually by means of private enterprise, 
or acting collectively under legislative regulation, should 
strive to keep in mind. In this connection we may appro- 
priately be reminded of Bacon's old adage to the effect that 
facts can only be modified on condition that we recognize 
the natural laws which govern them, and conform to these 
laws : naturce non imperatur nisi parendo. Alchemy strove 
to turn lead into gold ; chemistry has abandoned that use- 
less quest, having found that these two bodies are simple 
elements, or at least irreducible ones ; but it has not re- 
nounced the attempt to convert charcoal into diamond, for 
in this case it has established the presence of one single 
body in two different states. The Utopian uselessly tortures 
nature to obtain what it is powerless to give ; but the man 
of science seeks only what he knows to be possible. The 
sphere of this "possible" is infinitely more vast than the 
classical school imagines. 

Section 2. The Socialist School 

The socialist school is as old as the classical school ; older, 
we may even say, for there were socialists long before there 
was any science of political economy. It was, however, only 
after economics had taken a scientific character that social- 
ism, by antagonizing the newly established science, was first 
clearly formulated. As the doctrines of this school are 
especially of a critical nature, and show considerable diverg- 
ency, they are much harder to formulate than those of the 
preceding school. 1 Yet they may be summed up as follows : — 

All sects of socialists believe that the organization of 
modern societies is tainted by certain deep-seated defects, 

is itself predetermined by certain causes. This is, however, a problem of 
metaphysics not to be discussed here. 

1 Socialism, if we leave out of consideration a long line of precursors 
extending as far back as Plato, is represented in the nineteenth century 



THE SOCIALIST SCHOOL 29 

and that the present social organization is therefore bound to 
disappear sooner or later. In their opinion, this organization 
is not in the least a natural product of liberty, but the result 
of many acts of injustice and spoliation which have been 
hallowed by written laws. They maintain that the source 
of these evils lies in free competition and in individual or pri- 
vate property. They seek to prove that these two institutions 
tend to sacrifice the general interest to private interest, and 
constantly to increase the wealth of a small number of per- 
sons while multiplying the number of those that are poor, — 
thus realizing more and more the old motto : paucis humanum 
genus vivit. 

principally by Saint-Simon, Fourier, and Proudhon, in France ; by Owen, 
William Morris, and the Fabiar. Society, in England ; by Karl Marx, Las- 
salle, Rodbertus, and Friedricb Engels, in Germany ; by Colins, de Paepe, 
and Vandervelde, in Belgium. Socialism, in the United States, aside from 
numerous small religious communities organized on a socialistic basis, is 
almost entirely of foreign in portation ; although Edward Bellamy's romance 
"Looking Backward" has probably been the most widely read socialist 
Utopia of modern times. 

French authors have contributed most to the older Utopian socialism ; but 
the Germans have given modern socialism, called collectivism, its distinctive 
physiognomy, The form called anarchism is due principally to Proudhon 
and the Russians Bakunin and Kropotkin. It has been widely propagated 
only among the Latin -aces, i.e. in France, Spain, and Italy. Russian nihil- 
ism, generally confounded with anarchism, has nothing to do with it. 

From the very er tensive bibliography of socialism and anarchism we 
refer the student to the following books : — 

Bae, "Contemporary Socialism." Kirkup, "History of Socialism." 
Graham, " Socialis n Old and New." Zenker, "History of Anarchism." 
Laveleye, " Socialism of To-day." Schaeffle, "Quintessence of Socialism." 
Dawson, " German Socialism and Ferdinand Lassalle " and "Bismarck and 
State Socialism." B. T.Ely, "Labor Movement in America." Winterer, 
"Le Socialisme Ccntemporain." Bourdeau, "L'Evolution du Socialisme." 
Kautsky, "Karl M^rx' Oekonomische Lehren." Flint, "Socialism." "Die 
Geschichte des Socialismus in Einzeldarstellungen," published by Dietz at 
Stuttgart, and written by a number of well-known socialists in several volumes. 
"Fabian Essays or Socialism." Janet, "Les Origines du Socialisme Con- 
temporain." Metin, " Le Socialisme en Angleterre." Von W alter shausen, 
" Der Moderne Socialismus in den Vereinigten Staaten." Webb, "Social- 
ism in England." 



30 PRINCIPLES OF POLITICAL ECONOMY 

They therefore prophesy a new order of things in which 
private property, if not completely abolished, will at any 
rate be continually reduced. According to the extent of their 
demands in this direction, they may be classified thus : — 
those who favor the entire suppression of private property in 
all kinds of wealth are called communists; those who favor 
the suppression of property in the instruments of production 
are called collectivists ; those who favor the suppression of 
property in land and buildings are called nationalists. 

As for the details of the future society there is much dis- 
agreement and doubt. The old socialists (Sir Thomas More, 
Saint-Simon, and Fourier), who are sometimes disdainfully 
called " Utopian " and whose doctrines are nowadays some- 
what — perhaps too much — discredited, attempted to build 
up a complete social structure based on an a priori concep- 
tion of justice. The others, who proudly assume the title of 
scientific socialists (Karl Marx, Lassalle, Friedrich Engels) 
assert that this future society will issi e forth from the pres- 
ent society like a butterfly from its chrysalis. They refuse 
to describe its features. The most interesting and original 
part of their thesis consists in the attempt to prove that the 
society of the future is already contained, in an embryonic 
state, in the womb of our modern societies which are nearly 
ready for its birth. 1 They point out certain features of 
present society, which, in their opinion, ire the prelimi- 
nary symptoms of a socialistic state : production on a large 
scale, trusts, machine industry, the development of public 
services, etc. 

The classical school maintains that the socialists deny 
the existence of natural laws. This is by no means true, 
for the "scientific socialists" are ultra-deter tninistic. The 
liberal school in its use of the term "natural law" implies 

1 So far as any attempts have been made to outline the collectivist society 
of the future, a description may be found in Schaeffle's " Quintessence of 
Socialism," Gronlund's "Cooperative Common wealth," and G. Renard's 
" Le Regime Socialiste." See also the " Fabian Essays " (London). 



THE SOCIALIST SCHOOL 31 

the idea of stability and immutability, but the contem- 
poraneous school of socialists employs the same term as im- 
plying the idea of change and of ceaseless transformation. 
They do not agree with Bastiat in regarding human societies 
as turning round a fixed point in an eternal and changeless 
equilibrium. They consider society to be like a plant or an 
animal, which from birth to death undergoes constant trans- 
formation. We must admit that the latter point of view is 
in better harmony with contemporary science. Besides, 
most socialists expect a revolution, and regard it as indis- 
pensable for the substitution of the new social order for the 
old. Coming from evolutionists, this opinion may at first 
appear surprising ; they seek to justify it, however, by call- 
ing attention to the fact that the process of evolution often 
involves a crisis, i.e. the sudden and perhaps violent passage 
from one state to another. As illustrations of this they men- 
tion the chrysalis, which, before becoming a butterfly, must 
tear away its cocoon ; or the chicken, which, to leave the 
egg, must break the shell with its beak. 

All these schools (save one alone, the anarchist school, 
which, on the contrary, is violently individualist) are natu- 
rally disposed to extend as far as possible the functions of the 
government, since their aim is to transform into public 
agencies all that which to-day springs from private enter- 
prise. 1 

It is impossible in this chapter to estimate the value of the 
criticisms directed by socialists against the present social 

1 It is only, however, as a transitional step that socialism asks for the ex- 
tension of the functions of the government. For it professes the greatest 
contempt for the State as it is to-day, — the bourgeois State, as it terms it, — 
which looks after its interests and carries on its enterprises by the same 
methods as individuals. In its plans for reorganizing society, this school 
avoids the word "state," and prefers to use the term " society." The State, 
in the socialist plan, is to lose all political character, and to become purely 
economic ; it is to become something analogous to the administrative council 
of a huge cooperative society embracing the entire country. It is in this 
respect that true socialism, — proletarian socialism, called "social democ- 
racy" in Germany — differs from state socialism. 



32 PRINCIPLES OF POLITICAL ECONOMY 

order ; we shall hereafter refer to them repeatedly. Suffice 
it to say here, in explanation of the rapid growth of socialism, 
that these criticisms contain a large share of truth, and have, 
taken all in all, exerted a salutary influence on the thought 
and tendency of the century. 

But as a positive doctrine, i.e. as proposing a new system 
to be substituted for that under which we live, socialism 
remains conjectural. The ideal future state announced as 
coming seems to be neither realizable nor, from many points 
of view, even very desirable. All the proposed systems, 
after having won over a few enthusiastic disciples, have been 
abandoned or continue to exist only as vague hopes ; and as 
for the programme of so-called scientific socialism, many of 
its disciples are beginning to doubt that it has pointed out 
the true course of economic evolution. (This subject will be 
discussed under the title " Collectivism " in Book V.) 

Section 3. State Socialism 

This doctrine should by no means be confounded with the 
preceding one. It represents, on the contrary, an antidote 
for social democracy, and is generally as popular with es- 
tablished governments as the other is with the revolutionary 
parties that seek to overthrow them. 

It is closely connected in its origins with the historical 
school, of which we have spoken in the preceding division. 
The historical school was first distinguished from the classical 
school only in point of method ; but it soon came to differ from 
it in its tendencies and its practical programme. It began by 
absolutely rejecting the characteristic principle of the liberal 
school, that of "laisser faire." It gave a 'practical aim to 
political economy ; it regarded the old separation of art 
and science, at least in the social sciences, as antiquated, and 
thus returned to the position of the earlier economists. Al- 
though this school concedes that we cannot modify economic 
institutions so completely as to transform history, it main- 



STATE SOCIALISM 33 

tains that with due regard for history we can, and should, 
modify these institutions to some extent. 1 It maintains that 
science should include art, and that the past is allied with the 
future. That which is, that which ivill be, and that which 
ought to be, — are all inseparable and should be studied 
simultaneously. 

The small importance attached by this school to the idea 
of natural law explains precisely why it attaches so great an 
importance to positive laws made by legislators, and considers 
them one of the most potent factors of social evolution. 2 
Far from sharing the dislike or the misgivings of the liberal 
school in this respect, it favors a considerable extension of 
the functions of the state. 

This school has exerted a wide influence in recent years, 
not only in the thoughts of men, but in legislation as Avell. 
Most of the laws, enacted during the past twenty years, known 
as labor laws, as well as a strong movement in favor of an in- 
ternational regulation of the conditions affecting labor, are 
largely due to the influence of this school. It has certainly 
rendered a great service to science in widening the narrow, 
factitious, too simple, and irritatingly optimistic point of 
view that prevailed in the classical school. It has aban- 
doned entirely the attitude of systematic abstention from 
all practical matters, and to the question, " What should be 
done ? " it is not satisfied to give the sterile answer, " Laisser 
faire." 

It has also been helpful in showing that the extreme mis- 
trust of the state, manifested by the liberal school (which 

1 For instance : whereas the classical school considers property in land and 
the wage system permanent institutions due to necessary and general causes, 
the historical school considers them simple " historical categories," that are 
due to various causes, and have taken very different forms, according to time 
and place. 

2 "The laws with which political economy is concerned, are not laws of 
Nature ; they are the laws enacted by legislators. The former are beyond 
the will of man; the latter are its product." — De Laveleye, "Elements 
d'Economie politique," p. 17. 



34 . PRINCIPLES OF POLITICAL ECONOMY 

would leave to the state hardly more than the work of pre- 
paring the way for its own progressive abdication) is not 
scientifically well-founded. History has shown the state to 
be a very active factor of social progress {e.g. the abolition 
of slavery, of serfdom, of guilds, and the enactment of indus- 
trial laws), and an institution whose powers are steadily in- 
creasing. Individual initiative is often powerless to bring 
about great social modifications. The great objection to 
state socialism is that the state, even when it accomplishes 
reforms that are good in themselves, usually can do this only 
by means of laws, i.e.. by means of constraint. But in every 
association, even voluntary, it is fully admitted that the 
minority should bow to the will of the majority. Moreover, 
the state does not always act by means of coercion, prescrib- 
ing or forbidding this or that ; very often it acts by way of 
example, when it employs labor ; or by way of assistance, when 
it supports social institutions, financially or otherwise, or 
when it places at the disposal of its citizens such institutions 
as schools, pension funds, or insurance organizations. 

Another grave objection which has been raised against 
state socialism is that too often the state has shown the 
most deplorable incapacity in economic matters, and has at 
times become the instrument of parties, rather than the eco- 
nomic organ of the whole nation. 1 But these defects are due 
less to the essential nature of the state than to its present 
organization. We must not forget that the state, even in 
countries that are most advanced from a political point of 

1 Professor Leroy-Beaulieu, in his "Precis d'Economie Politique," gives 
an excellent summary of the various objections urged by the liberal school 
against the extension of the functions of the state. His objections are : — 

(1) The state lacks initiative and activeness, because it is not subject to 
the spur of egoism and competition. 

• (2) It possesses no real superiority over individuals, either from the point 
of view of capacity, or impartiality, or even in continuity of pwyiose, when 
we consider the origin, the manner of working, and the inevitable vicissi- 
tudes of every form of government, especially that form which is tending 
to become universal, i.e. democracy. See Herbert Spencer, " Man versus 
the State." 



CHRISTIAN SOCIAL REFORM 35 

view, — we may say, especially in these countries, — - was or- 
ganized for the purpose of political functions, and by no means 
with a view to economic functions. The division of labor in 
matters of government is still embryonic ; governmental power 
is unstable ; franchise systems, even that which is called " uni- 
versal," and which does not always represent the will of the 
majority, are crudely organized ; — all these circumstances 
unfit the state for the accomplishment of economic purposes. 
But it is reasonable to hope that when the state is consti- 
tuted with a view to its new functions, it will be able to 
exert a better and stronger influence in the economic domain 
than it has thus far exerted. 

Section 4. Christian Social Reform 

This school may be divided into two branches, which 
differ widely in their ultimate goals, but which have the 
same starting-point and correspond naturally to the two 
great divisions of the Christian church. 1 

The Catholic School 2 firmly believes, with the classical 
school, in the existence of natural laws, which it terms laws 
of Providence, and which govern social facts as well as the 
facts of the physical world. Only, it believes that the opera- 
tion of these providential laws may be seriously interfered 

1 The chiefs of this school belong either to the Church (von Ketteler, the 
Bishop of Mayence, Pastor Friedrich Naumann, Cardinal Manning, the 
Archbishop of Westminster) or to political life (Count de Mun in France, 
Prince Liechtenstein in Austria, and M. Decurtius in Switzerland). In 
England the names which most frequently recur in connection with Christian 
socialism are those of F. D. Maurice, Kingsley, Vansittart-Neale ; in the 
United States, those of R. T. Ely, W. D. P. Bliss, G. D. Herron, and R. Heber 
Newton. Consult: Nitti, "Catholic Socialism"; Kaufmann, "Christian 
Socialism " ; Joly, " Le Socialisme Chretien " ; Peabody, " Jesus Christ and 
the Social Problem. 1 ' 

2 Gide's distinction of the Catholic and Protestant schools of social 
reform, although perfectly clear to a French reader, is scarcely intelli- 
gible in this country, where Protestants and Catholics often have adopted 
similar social reform programmes, and where membership of the same religious 
community by no means indicates an agreement concerning social questions. 



36 PRINCIPLES OF POLITICAL ECONOMY 

with by the evil use of human liberty, and that this is pre- 
cisely what has taken place. Through the fault of man, the 
world is not what it ought to be, — not what God wanted it 
to be. Differing from the liberal school, Catholic reformers 
are by no means optimistic ; they do not consider the social 
order as good nor even as naturally tending toward better- 
ment. Above all, they have no confidence in the let-alone 
policy for establishing harmony and assuring progress, since, 
on the contrary, they regard liberty, or at least what is called 
liberalism, as the true cause of social disorganization. 

The vehemence of the criticisms which the Catholic school 
directs against the present social organization, against capital- 
ism, against profit, against interest (which the Church in the 
Middle Ages designated as usury — usura vorax), against stock 
companies, against free trade and all forms of internationalism, 
and, above all, against free competition, has led the liberal 
economists to give it the name of Catholic socialism. It 
objects strenuously, however, to this designation, and despite 
many points of view which suggest a community of thought, 
it differs toto orhe from the socialist school. First of all, it 
by no means proposes to abolish the fundamental institutions 
of the present social order, — property, inheritance, the 
wage-system, — but rather to restore and to strengthen them. 
Furthermore, it in no wise believes in evolution or the 
unlimited progress of mankind, and is much less inclined to 
seek its ideal in the future than in a return to institutions 
of the past, such as rural life, and especially guilds of 
employers and employees. Finally, it professes as little con- 
fidence in the principle of equality as in that of liberty, and 
counts on reestablishing social peace by means of three 
kinds of authority : that of the father, in the family ; that 
of the employer, in the workshop ; and that of the Church, in 
society as a whole. It is of course understood that these 
three kinds of " social authority " imply commensurate duties. 

Generally speaking, this school is not hostile to the inter- 
vention of the state, which is, "after the Church, God's 



CHRISTIAN SOCIAL REFORM 37 

minister for good." It even formally favors such interven- 
tion to assure Sunday rest to the laboring classes, the regula- 
tion of labor within just limits, etc. However, one section 
of the Catholic school is as much opposed to state interven- 
tion as the liberal school, and this problem has given rise to 
very lively discussion among Catholic social reformers. 

The strongest objection that can be urged against this 
doctrine, omitting all controversy in the field of politics 
or religion, was long ago formulated by John Stuart Mill, 
when he said that there is no instance of an}^ class of society, 
in the possession of power, ever having used this power in 
the interest of the other classes of society. There is great 
danger that any guardianship by the upper classes, if ever 
they were entrusted with the task of solving the social 
problem, would confirm Mill's statement. 

The Protestant school shows quite as little sympathy with 
the present economic order as the Catholic school. It like- 
wise denounces competition and the pursuit of mere material 
gain. It regards property above all as a social trust. It 
believes that the world must be radically transformed in 
order to approach more closely to the " Kingdom of God," 
— the advent of which all members of the Church should 
anticipate and work for, even on earth. 

Faithful to its democratic traditions, which make of each 
Protestant church a small republic, it aims to apply the same 
democratic regime to industry. It does not attempt a solu- 
tion by means of guilds, which, in its opinion, experience 
proves unsuitable, and which seem to develop collective ego- 
ism. It proposes the so-called cooperative form of associa- 
tion, and maintains that cooperation is the exact antithesis 
of competition. The " Christian socialists " — as they were 
called in the days of Kingsley and Maurice — for this reason 
played an important part in the English cooperative move- 
ment of the middle of the nineteenth century. 

As for state intervention, it is difficult to discover among 
Protestants any general programme concerning this point. 



38 PRINCIPLES OF POLITICAL ECONOMY 

We can readily understand that a unanimity of opinion is even 
less likely to exist among Protestant social reformers than 
among the Catholics. Opinions vary all the way from 
Pastor Stoecker's state socialism (in Germany) to Herron's 
evangelical communism (in the United States). In England, 
Protestant socialism has been very favorable to the nation- 
alization of land. In France, it has generally advocated the 
doctrine of social solidarity, which we shall now examine. 

Section 5. The Doctrine of Solidarity 

In this rapid review we cannot omit a school which is only 
a few years old, but whose influence is rapidly increasing, — 
the school that takes " solidarity " for its motto. 

The fact of solidarity, i.e. the mutual dependence of man- 
kind, clearly demonstrated by the division of labor, exchange, 
and (as regards successive generations of men) by heredity, 
did not escape the attention of the classical economists. 
Bastiat often speaks of it in his "Harmonies Economiques." 
But he regarded it as a natural law, which did not require 
the assistance of individuals to work itself out. The school 
of solidarity, on the other hand, conceives solidarity as the 
desirable result — the express aim — toward which we should 
bend our will. Hence it regards as the foundation of soli- 
darity — to say nothing of the natural phenomena of inter- 
dependence which are unconscious, and therefore have no 
moral worth — those voluntary contractual associations and 
institutions that are created deliberately with a view to 
developing this feeling. It differs from the liberal school 
by repudiating the principle of competition and the struggle 
for life. It endeavors to substitute the principle of coopera- 
tion between opposing interests, and the idea of a " union 
for existence." To those who object that this belittles indi- 
viduality, it replies that individuality is no less developed by 
helping others than by helping one's self. 1 

1 Vinet, the Protestant critic, has admirably said that "to give one's self, 
one must own one's self." 



THE DOCTRINE OF SOLIDARITY 39 

It differs from the revolutionary school because it does not 
believe in the efficaciousness of revolution or expropriation 
as a means for transforming man or even his social environ- 
ment. It works, however, for the realization of the principal 
desiderata of socialism, such as the insurance of all persons 
against sickness, accident, etc. ; the greatest possible equality 
of opportunity for all ; the transformation of property, inher- 
itance, the wage-system, and taxation ; the limitation of 
money power ; the attenuation of competition, etc. 

As means to these ends, it advocates association in all its 
forms, and particularly cooperative association, because this 
is the most complete of all. But it is not hostile to state 
intervention whenever labor legislation, sanitary laws, or 
laws concerning pure food tend to prevent the degradation 
of the masses ; or whenever certain kinds of obligatory 
insurance or precautionary regulations tend to train the 
various classes of the nation in the practice of solidarity. It 
does not forget that the state is itself the oldest and most 
impressive form of solidarity among men. The fact that 
this solidarity is obligatory, instead of purely voluntary, 
does not diminish its power. Doubtless the habit of soli- 
darity does not acquire its full moral value until it becomes 
voluntary ; but the solidarity imposed by law may be indis- 
pensable in preparing the way for the fuller development of 
free cooperation. 

This doctrine has the rare privilege of attracting adherents 
from all classes and parties : the faithful believers in the 
old idealistic French socialism of Fourier and Leroux ; the 
disciples of Auguste Comte ; the mystical and assthetical 
followers of Carlyle, Ruskin, or Tolstoi; those who work 
in the Church, and those who work in biological laborato- 
ries. But its good fortune is perhaps due to the fact that 
its program is still quite indeterminate. 1 

1 This school counts more of its adherents among philosophers and sociolo- 
gists, especially those of France, than among economists strictly speaking. 
Consult the article on "Solidarity" in Gide's volume on "Cooperation," 



40 PRINCIPLES OF POLITICAL ECONOMY 



VI. The Wants of Man 

The wants of man are the underlying motive of all eco- 
nomic activity, and consequently the starting-point of economic 
science. Every living being requires for its development 
and the accomplishment of its purposes some help from with- 
out, and must assimilate certain elements of the outside 
world. From the plant (and even from the crystal) up to 
man, this necessity increases with the increase of individu 
ality. Every want felt by a living being gives rise to a 
desire, and consequently to an effort to obtain possession of 
the necessary exterior objects, 1 because their possession implies 
gratification, whei^as the lack of them means suffering. 2 

the works of Carlyle, Ruskin, and Professor R. T. Ely ; Paulsen, " System of 
Ethics" ; and a recent book by Leon Bourgeois, "Solidarite," third edition, 
Paris, 1902. 

1 Want or desire exists only when it is directed toward a particular object 
recognized as capable of satisfying it. In this sense, M. Tarde observes that 
"the first cause of every economic desire is invention" ("La Logique 
Sociale," Chapter 7). Eor it is evident that the desire to smoke and to drink 
spirits could arise only after the discovery of tobacco and after the preparation 
of alcoholic beverages. Similarly, the habit of cycling owes its origin to the 
invention of the bicycle. 

We are told that " necessity is the mother of invention.' 1 This is also 
true in the sense that invention, or the search for objects and devices that 
will procure satisfaction, is itself the result of natural wants or instincts, such 
as hunger, cold, fear, etc. The discovery of tobacco and of alcoholic drinks, 
or at least the widespread consumption of these things, must evidently re- 
spond to a need of the nervous system that is felt by many persons; the inven- 
tion of the bicycle is the result of the general need for rapid transit. 

2 The wants of man are innumerable. It would be useless to attempt to 
enumerate them. They may, however, be classified, according to primitive 
archaeology and our knowledge of the customs of savage tribes, under the 
following heads : — 

(1) Food. This was certainly the first of wants, inasmuch as the existence 
not only of man but of every organism depends directly on it. The life of 
animals and of savage mankind is entirely taken up with the quest for food. 
In all civilized societies, too, it plays the greatest part. More than half the 
total wealth of society is produced for use as food. 

(2) Struggle for life, i.e. defence and combat. Next to food, with which 
it is closely allied, this want is most important. Even among animals it is of 



THE WANTS OF MAN 41 

The wants of man have several characteristics, each of 
which is important because some great economic law is based 
on it. 1 These characteristics are the following : — 

(1) Human wants are unlimited in number. This feature 
distinguishes man from the inferior animals and is the main- 
spring of civilization in the strictest sense of the word. To 
civilize a people is to increase its wants. 

The wants of humanity are at first like those of a child. 
At birth the child needs nothing but a little milk and a warm 
covering ; but soon he requires more varied food, more com- 
plicated garments, and toys ; each year gives rise to new 
needs and new desires. The more he learns and sees, the 
more numerous and intense are these desires. 

We are to-day conscious of a thousand wants that were 

very great moment, although it does not give rise to any industry among 
them, — unless we regard in this light the traps that some insects prepare for 
their victims, like the spider's web. Usually, the weapons used by animals 
are purely natural. 

(3) Housing. The need of shelter is felt even by animals, and gives rise 
among them to many curious industries. 

(4) Ornament. It may cause some surprise that we give this want so emi- 
nent a place. Yet prehistoric archaeology and the accounts given by travel- 
lers among primitive peoples show that this need is experienced even earlier 
than the need for clothing. It is the first need that distinguishes man from 
animals. The'ophile Gautier has remarked that " no dog ever conceived of 
wearing earrings ; but the stupid Papuans, who eat clay and earthworms, 
hang colored berries and shells from their ears, while they go about stark 
naked." 

After these four fundamental wants, others arise and mark the beginnings 
of civilization. These civilized wants fall under the head of religion (charms, 
idols), clothing (which varies according to the requirements of climate, 
weather, good manners, social rank, and aesthetic taste), recreation and art 
(musical instruments, games, carved bones and stones), transportation and 
intercourse (boats, chariots, social clubs), instruction (stone or bronze tablets, 
papyrus, parchment, books), and comfort, the last of all. 

The present relative importance of wants is discussed in Book V. 

1 Although the study of human wants is of fundamental importance to 
political economy, it has been almost entirely neglected, if we except Fourier's 
somewhat fantastic contributions to the subject. It has, however, very recently 
been made the subject of an important book by Tarde entitled "La Psy- 
chologie dconomique " (Paris, 1902). 



42 PRINCIPLES OF POLITICAL ECONOMY 

unknown to our grandfathers, — wants of comfort, hygiene, 
cleanliness, education, travel, intercourse. It is certain 
also that our grandchildren will feel new wants. If we 
should discover, on another planet, beings superior to men, 
we should find among them a multitude of wants of which 
we in this world know nothing. Nations are doomed if they 
are too easily satisfied, and if their desires do not extend 
outside the small circle of necessity. Nations whose people 
are content with a handful of ripe fruit and a sleeping-place 
in the shade will succumb in the international struggle for 
life. They are destined to disappear quickly from a world 
in which they scarcely know how to subsist. 1 

Is this unlimited multiplication of wants commendable ? 
Is it necessary ? Is it not to be desired that wants should 
cease increasing so rapidly ? Admitting that the increase of 
wants gives rise to an increase of production and of wealth, 
is not nature making a dupe of man, inasmuch as with the 
satisfaction of every want another want immediately takes 
its place ? Is it not true, therefore, that man is con- 
stantly in pursuit of a constantly receding goal, and is 
unable ever to acquire peace of mind ? An example of 
this is furnished by our working classes, whose envy of 
others increases with their own well-being. Would it not, 
therefore, be better to diminish our wants than to increase 
our wealth ? 

Let us not be deceived. If we desire a diminution in the 
number and intensity of wants that aim at wealth, which 
to-day make up too great a part of our social activity, this 
is in perfect agreement not only with Christian ascetics and 
mystics like Tolstoi, but even with such economists as John 
Stuart Mill. But this desire is conditioned on the assump- 
tion that these wants will be abandoned in order that nobler 
ones may take their place ; for if we simply gave them up 

1 The rise of wants through invention, and their propagation by imitation, 
are studied by M. Tarde in the book already mentioned, and in " LesLois de 
limitation. " 



THE WANTS OF MAN 43 

without filling their place, that would mean the retrogression 
of social life toward the animal state. 

Moreover, it must be remarked that even purely economic 
wants are not devoid of moral value, 1 for every new want 
constitutes a new social bond ; generally we can satisfy our 
wants only with the aid of others, and this fact strengthens 
the feeling of solidarity. The man who has no wants — the 
hermit — suffices unto himself, which is precisely what a 
man should not do. As for the working classes, we should 
rejoice, not regret, that new wants and desires constantly 
plague their minds; for without new wants they would have 
remained in an eternal condition of slavery. 

(2) Wants are limited in intensity. This is one of the 
most important propositions in political economy, for on it, as 
we shall see, is founded a new theory of value. 

Wants are limited in intensity because every want is satia- 
ble, i.e. a certain amount of a certain kind or kinds of wealth 
will satisfy it completely. It is evident that a man needs 
only a certain amount of bread to satisfy his hunger, and a 
certain amount of water to slake his thirst. We may say 
that a want decreases in intensity up to the point of satiety. 
Then the want is extinguished and is replaced by disgust or 
even suffering. 2 It is torture to suffer thirst; but it was 
also torture, in the Middle Ages, to undergo the "watering 
operation," by which the victim was compelled to absorb 
excessive quantities of water. 

The more natural a want is, i.e. the more physiological its 
nature, the more clearly drawn is its limit. It is easy to tell 
how many pounds of bread and how many pints of water a 

1 The theory of historical materialism, taught especially by the school of 
Marx (and by Loria in his book on the Economic Bases of Social Organiza- 
tion), considers economic wants the source of all other wants, — political, 
aesthetic, religious, etc. 

2 This is like the well-known mathematical series which diminish until 
they reach zero and then increase, as minus quantities, below zero. The de- 
grees of want-intensity are the positive quantities of the series ; the degrees 
of dislike are the negative terms ; zero is the point of satiety. 



44 PRINCIPLES OF POLITICAL ECONOMY 

man needs. But the more artificial or social a want is, the 
more elastic is the limit marking its satisfaction. It is cer- 
tainly not an easy matter to tell how many horses would 
satisfy a sportsman, or how many dresses would lead a fash- 
ionable woman to cry " Enough ! " or the number of rubies 
desired by an Indian rajah, or how much money would com- 
pletely satisfy the wants of a civilized man. Nevertheless, 
we may say that even for these wants there is a limit ; in 
these respects, too, satiety is inevitable. At all events each 
new possession gives less pleasure than the preceding one. 1 

(3) Wants are competitive, i.e. one want can often be 
developed only at the expense of other wants which it 
abolishes or absorbs. According to the proverb, the old 
must make room for the new ; similarly, one want takes the 
place of another. This simple fact is the basis of an impor- 
tant economic law called the law of the substitution of wants. 
Progress consists generally in replacing inferior wants by 
higher wants. To combat drunkenness, for example, tem- 
perance societies have found nothing more successful than 
"temperance restaurants" in which an effort is made to 
accustom people to drinking tea and coffee. We should also 
note that a material want may give way to an intellectual 
want (the saloon to the reading-room) or a moral want 
(when, for example, a laborer deprives himself of a drink in 
order to pay his dues to a benefit society, a labor organiza- 
tion, or a reform club). 

(4) Wants are complementary ; they form groups. This 
seems to be antagonistic to the above-named principle, yet it 
is not so. Are not the persons engaged in any branch of 
production competitors as well as co-workers ? Similarly, 

1 In the case of money, satiety seems to be most infrequent and improbable. 
"Why ? For the simple reason that money is the only kind of wealth which 
has the property of satisfying, not only a specific want, but all possible wants ; 
consequently it is desired until all our wants are entirely satisfied. This puts 
the point of satiety exceedingly far off. Nevertheless, it is evident that an 
extra dollar does not provide a millionnaire with a pleasure at all comparable 
to that which it procures for a beggar. 



THE WANTS OF MAN 45 

there is competition among wants of the same sort, among 
wants that are interchangeable ; but there is harmony among 
wants of different kinds. The want of food is allied, in civil- 
ized societies, with the want of tables, chairs, table-cloths, 
napkins, glassware, knives, and forks. In order to obtain a 
maximum of enjoyment, many pleasures must be combined, 
and thus give rise simultaneously to large groups of wants. 

(5) Wants, even acquired or artificial wants, tend to 
become a matter of habit. They become, as the popular 
expression aptly puts it, our "second nature." This, as we 
shall see, is of great importance in the determination of 
wages. The customary plane of existence — the standard 
of living — cannot easily be lowered. There was a time 
when workmen wore neither shirts nor shoes, when they had 
neither coffee nor tobacco, when they ate neither meat nor 
white bread ; but to-day these wants are so deep-seated, they 
form so fundamental a part of our nature, that a workman, 
if he were deprived of them and suddenly reduced to the 
condition of his social equals in the time of good King 
Henry, would probably perish. 

If we add, finally, that a habit which has been transmitted 
from generation to generation tends in time to become 
established through heredity, and that our senses are every 
day becoming more subtle and more exacting, we shall 
understand the despotic p ower that may eventually be 
acquired by a want that originally seemed to be futile or 
insignificant. 

It must not be supposed, however, that wants once ac- 
quired are perpetual. There is, as we have said, a competi- 
tion or rivalry among some wants. Some of them are 
vanquished and disappear. The show-cases of our museums 
are filled with objects that at one time satisfied a real want, 
but which now correspond to no human desire save that of 
the collector of curios. But wants perish only when they 
are supplanted by others that are more strongly felt or 
whose satisfaction affords greater enjoyment. 



46 PRINCIPLES OF POLITICAL ECONOMY 

VII. What is Wealth ? 

We have said that man, in order to satisfy his wants, is 
obliged to make use of parts of the outer world, — of objects 
generally known as wealth or riches. In ordinary speech 
the word " wealth " is synonymous with the word " fortune " 
and means extensive valuable possessions. It seems strange, 
therefore, to apply the term " wealth " to a loaf of bread. 
Yet this is perfectly correct and scientific, if we mean by 
" wealth " all that can satisfy human wants. The capacity 
for satisfying human wants is called " utility." Accordingly, 
to avoid confusion, the term " utilities " would perhaps be 
better than wealth. 

The utility of a thing presupposes the discovery of a rela- 
tion between its physical properties and some human want. 
Thus, bread is useful because we require nutrition and be- 
cause wheat contains nutritive elements. Again, diamonds 
are much desired because it is the nature of man to take 
pleasure in the contemplation of brilliant objects, and be- 
cause diamonds have a refractory power superior to that of 
any other known body and productive of brilliant rays of 
light. 

Thus utility depends, first, on a want felt by man, and, 
secondly, on an object capable of satisfying that want. Of 
these two features of utility, man, not the object, is the more 
important. One might be disposed to believe the contrary, 
viz., that the anticipated satisfaction consists in properties of 
things, that the utility of gold is of the same nature as its 
weight or its lustre or its inoxidizability, — in other words, 
that utility attaches to the objects themselves, like a quality 
which appeals to the senses. This is not so. Utility arises 
only with desire and vanishes with the extinction of desire. 
As a shadow follows a butterfly from one flower to another, 
so utility accompanies desire, and abides only where desire 
rests. It is subjective, not objective. It matters little that an 
object has qualities that may satisfy the wants of man, if 



WHAT IS WEALTH? 47 

man is not aware of the fact, or if, because of insufficient 
power, he is unable to utilize the object. In both cases the 
object in question is not a utility, and therefore is not wealth. 
Potatoes were not wealth until Parmentier, with great diffi- 
culty, propagated their use as food. The falls of Niagara 
did not represent economic wealth until we learned how to 
utilize their motive power. Every object in the world 
might be useful to man and capable of increasing wealth. 
But at present not all objects are wealth, any more than the 
fertile lands or the precious stones that astronomers may dis- 
cover on the planet Mars. 

Contrariwise, it matters little that an object has received 
from nature none of the properties adapting it to the satis- 
faction of our wants if only we think that it possesses them. 
For hundreds of years men have attributed wonderful prop- 
erties to various relics, more or less authentic, which have 
therefore been regarded as incomparable wealth. There are 
many mineral waters and patent medicines that command 
high prices, although their curative powers are exceedingly 
doubtful. How many things there are whose value and 
whose utility is due to a passing whim or fancy ! There are 
many costumes that are no longer worn, paintings that are 
no longer admired, coins that have no purchasing value, and 
remedies that do not cure. The list would be long if it 
were to include all kinds of wealth whose utility was as flit- 
ting as the want that gave rise to them. Nevertheless, if 
the desire of the collector of relics (perhaps the most intense 
of all desires) should happen to fix on one of these kinds of 
dead wealth, these worthless objects would acquire a new 
lease of life and might possess a value greater than that 
which was originally attributed to them. 

In the opinion of scientists alcoholic drinks do not possess 
any of the good qualities sometimes attributed to them ; 
they furnish neither strength nor warmth. But what does 
this matter from the view-point of the economist ? Millions 
of men in all countries unfortunately believe them to possess 



48 PRINCIPLES OF POLITICAL ECONOMY 

certain desirable qualities ; they therefore constitute wealth, 
— wealth that is estimated at many millions and by means 
of which many governments obtain a large part of the public 
revenues. 

Hence we must define wealth as all that mankind believes 
to be useful and can utilize. 1 

It is unfortunate for a science to borrow its terminology 
from everyday speech. It is plain, for example, that in 
political economy the word " utility " has an unusual mean- 
ing. For this reason it has been proposed to substitute 
some newly coined word. In the first edition of this book 
(published in 1883) we proposed, and have since then em- 
ployed, the word "desirability." This word has the two- 
fold advantage of placing the emphasis on the subjective 
side of economic utility, and avoiding all reference to the real 
or imaginary, moral or immoral, causes that may give rise 
to desire. In his " Course of Political Economy," published 
in 1896, Professor Vilifredo Pare to suggested, and has since 
then employed, the word " ophelimity," which possesses the 
same advantages but has the inconvenience of being intelli- 
gible only to those who are familiar with Greek. But 
neither of these terms has been generally accepted in the 
language of economics. We must, therefore, be satisfied 
with the word "utility," giving it the particular meaning 
that we have attached to it. 

Another confusion due to the same cause is the belief that 
since utility is a property of things it can be possessed only 
by matter; that, consequently, all wealth is material. Many 
economists, even to-day, declare that the term " wealth " 
implies material goods, — for wealth is that which can be 
weighed, measured, and accumulated. 

This mistake could never have arisen if, instead of the 

1 This is the reason why M. Tarde regards faith and invention as the 
sources of all wealth : faith, because it is necessary that we believe in the use- 
fulness of the object ; invention, because it is necessary that we be able to 
use it. 



WHAT IS VALUE? 49 

term " wealth," we had used the term " utility " ; for it is 
evident that acts may be useful quite as well as things. How 
great is the utility of the services rendered by our fellow- 
men ! Although the expression has an unpleasant sound, is 
it not true that we " make use " of our friends, of our em- 
ployers, of our subordinates, as well as of things ? It may 
be objected that our fellow-creatures cannot be counted and 
evaluated in the same way as material wealth, unless they 
are slaves, i.e. unless they have become things. In reply to 
this, it must be said that persons are of course not things 
and cannot be regarded as wealth. But their acts and their 
labors, — the prescription written by a physician, the lesson 
given by a teacher, the advice of a lawyer, the performance 
of an actor, the playing of a musician, the service of our 
domestics, — why should not these be regarded as wealth ? 
Are not all of these acts useful ? Are they not all paid for ? 
After all, this problem is, in the main, a simple question 
of terminology. It is a simple matter to bring all the dis- 
putants to an agreement, without doing violence to every- 
day language, by reserving the word " wealth " for corporeal 
objects, and by designating as "services" all the acts of man 
that are capable of directly furnishing enjoyment. 

VIII. What is Value? 

In ordinary speech the words " value " and " wealth " (or 
"riches") are synonymous. Both involve the idea of utility. 
A thing that serves no purpose cannot be wealth or value. 
But if we look into the matter more closely we shall see that 
these two words do not express quite the same idea, and that 
sometimes they may imply even contrary ideas. 

The idea of wealth is allied to that of abundance ; to have 
too much of everything would be the acme of wealth. The 
idea of value, on the other hand, is most closely allied with 
that of scarcity ; the objects that are most scarce, other things 
being equal, possess the greatest value. 



50 PRINCIPLES OF POLITICAL ECONOMY 

Suppose that the magic wand of some fairy, or simply the 
unlimited progress of science and industry, had made all 
objects as abundant as the water of the rivers or the sand of 
the seashore ; men then would only need to help themselves 
to as much as they required of all things. Would not this 
be the maximum of wealth ? And yet, is it not evident that 
on this hypothesis all things, because of their superabundance, 
would have lost all value ? In fact, they would then have 
no more value for an individual than the water or sand to 
which we have compared them. Is it not plain, moreover, 
that in such a fairyland as this all men would be equally 
wealthy, just as to-day the sun shines equally on the million- 
naire and the beggar ? a 

The idea of value, at least in the ordinary acceptance of 
the term "money value," implies the thought of exchange, 
while the idea of wealth implies nothing of the kind. This 
distinction is a consequence of the preceding one, for the pos- 
sibility of exchange involves scarcity. There is no market 
and no purchaser for things that are everywhere abundant, 
— for water,, air, or even for land in newly settled countries. 
Yet these things are wealth, but have no value. There are 
also goods which, although scarce, cannot be exchanged, be- 
cause they are by their nature not transferable. Health, for 

1 J. B. Say regarded this problem as the knottiest in political economy, 
and expressed it in these terms, " Since wealth is composed of the value of 
things possessed, how can a nation be wealthiest when things are at the 
lowest price ? " And Proudhon, in his " Economic Contradictions," defied 
any thoughtful economist to answer the question. The supposed difficulty 
is due to the fact that the first clause of Say's phrase contains a false defini- 
tion. It is not true that "wealth is composed of values." But the second 
clause is correct, — a nation is "wealthiest when things are at the lowest 
price," because here the word "wealth" or "riches" is taken in its true 
sense, viz., abundance. 

Madame de Se>ign6, who cared little for economics, understood this per- 
fectly well when she wrote from her castle of Grignan, in 1673: "All our 
barns are full of wheat, and I haven 1 1 a cent. Surrounded by wheat, I am 
suffering want." She meant to say that the harvest had been a rich one, but 
that it nevertheless possessed little value. 



WHAT IS VALUE? 51 

example, which would certainly possess great value if it could 
be purchased, or a fine system of navigable rivers, represents 
great wealth but not value. 

Robinson Crusoe had certainly accumulated great wealth 
on his lonely island ; but it was not value until the arrival 
of the first vessel brought him into relations with the rest 
of mankind and made it possible to exchange this wealth. 
It is for this reason that the problem of value usually 
forms part of the study of exchange, and we shall here 
simply define it. 

But the most essential characteristic of value is the idea of 
a relation betiveen two things, or rather (as the things them- 
selves are of secondary importance), a relation between two 
desires or two wants. In other words, value implies not only 
a desire — which might be conceived as existing alone — but 
the preference given to one thing over another, i.e. a com- 
parison of desires. Value cannot be conceived without a 
weighing of two things, or a comparison between them. 

Wealth and utility may exist of themselves, like the wants 
which they supply. When we say that a thing — a gun or a 
horse — is useful, we make a statement that is perfectly clear 
and intelligible. But if we say that a gun or a horse is worth, 
such a statement is incomplete and meaningless unless we 
add how much it is worth. We must add that it is worth so 
much money, or, if we are living among savages, so many 
pieces of calico, or so many elephant tusks ; that is to say, 
we must compare it to some other kind of wealth. 

Value, like weight or size, is therefore a relative notion. 
If there were only one object in the universe, it could not be 
called large or small, light or heavy ; nor could we say that 
it had much or little value. When we say that an object 
has " great value " the element of comparison, although not 
expressed, is understood. We mean that it has great value 
expressed in money, in which case we compare it to pieces 
of coin ; or else we mean that it occupies a high rank among 
riches, in which case we compare it to all other wealth con- 



52 PRINCIPLES OF POLITICAL ECONOMY 

sidered collectively. Similarly, when we say, without any 
comparison, that platinum is very heavy, we really mean either 
that it has a high specific gravity compared to water (the 
standard of comparison) or that it occupies a comparatively 
high place in a list of elements arranged according to weight. 1 

This matter is worth investigating. Why do we attach 
value to an object ? A little reflection shows that there are 
two different, and, in a way, opposite answers to this question. 
We may value things because of the pleasure they give us ; 
or, we may value them because of the effort, the trouble or 
the pain involved in their acquisition. These are, as a mat- 
ter of fact, the two ideas which underlie the concept of value, 
and which we hold to be true and inseparable. Economists 
have usually placed all the emphasis on one of these two ideas, 
and minimized the significance of the other. The innumer- 
able theories of value that have been offered may be classi- 
fied under these leading ideas ; the element of pleasure is 
foremost in those theories which found value on utility, while 
the element of pain is emphasized by the theories based on 
cost or labor. 

We shall explain each of them briefly. 

Section 1. Utility 

Utility, the quality which some things have of satisfying our 
wants, is, as Ave have seen, the characteristic of wealth. It 
would seem natural, therefore, to regard it as the cause of 
value. This was indeed the explanation given by the first 
economists — the physiocrats, Condillac and J. B. Say. 

When two objects satisfy the same want, this explanation 
of value is satisfactory. The degree of value in such a case 
seems to correspond exactly to the degree of utility. Of 

1 It follows that we ought never to speak of a rise or fall of all values. For 
if value is nothing more than an order, a classification, or a hierarchy estab- 
lished among articles of wealth, how is it conceivable that all values can rise 
or fall simultaneously ? Those that rise in the scale must take the place of 
others which therefore fall. 



UTILITY 58 

two fruits we prefer the more savory; of two sheep the fat- 
ter ; of two houses the more comfortable ; of two farms the 
more fertile ; and if the two objects, for instance two bushels 
of wheat, provide the same amount of gratification, they have 
as a rule the same value. But if we consider objects satisfy- 
ing different wants, — for instance a loaf of bread and a hat 
— this theory fails to tell which is the more useful. It fails 
therefore to explain value. 

It may be suggested that we should classify our wants 
according to reason, or ethics, or hygiene, just as the seven 
prismatic colors are classed according to the amplitude of 
their vibrations. Shall we then put at the head of the list 
those objects that satisfy the most essential wants, and, 
among these, place first those that best satisfy our essential 
wants ? If we do this, we shall have a long list of objects 
possessing value, each occupying the place to which its 
relative utility entitles it. A glance at such a list would 
show that the value of a commodity is not directly propor- 
tionate, but often inversely proportionate, to its rational 
utility. What, on the other hand, are the things that would 
occupy a low place in a list arranged according to values? 
Wheat, coal, iron, water, — just the objects that satisfy the 
most fundamental and essential human wants. The goods 
that would stand highest in this list of values would be 
gold, diamonds, lace, perhaps a broken piece of porcelain 
coming from a collection, or a rare edition of an old volume 
that no one has read or ever will read, — all objects that serve 
only to satisfy our curiosity or to please our vanity. 

Nor can it be objected that this condition of things is 
due to man's foolishness, — that if men were wise the order 
of values would be identical with the order of rational utili- 
ties. It is not our province to investigate what goods man 
ought to prefer ; the theory of value should explain that 
which is, not that which ought to he. The above objection, 
moreover, is not valid. Even if the earth were inhabited 
only by wise men, a glass of water would not be worth a 



54 PRINCIPLES OF POLITICAL ECONOMY 

cent more than it is now, although nothing is better adapted 
to the satisfaction of a fundamental human want. We must 
not forget what we have already said : that the value of any 
object varies constantly according to circumstances. It would 
therefore be manifestly absurd to say that the value of a 
commodity is determined by its utility. For there are many 
utilities, many uses for one and the same thing, and we must 
consequently ask, if utility determines value, — What utility ? 
The utility of a given object is not the same for A as 
for B. Again, an object may possess a degree of utility in 
the evening which it did not have in the morning. 

To escape this difficulty, an attempt has been made to 
supplement the notion of utility by that of scarcity. Utility 
alone cannot create value ; it remains, so to speak, latent 
unless it is combined with the quality of scarcity. Value is 
in this sense scarce-utility, as expounded by Walras (the 
elder) in France, and Senior in England. This modification 
of the preceding explanation enables us to solve many of the 
difficulties that troubled us. The idea of scarcity alone, 
however, is insufficient, unless we make it include much that 
the word does not really contain. For example, strawber- 
ries at the end of the season are as scarce as at the begin- 
ning, but they have less value because they are less desired. 
This explanation, moreover, does not satisfy the mind ; for 
at first it is difficult to understand the close relation between 
these two elements that seem to have nothing in common : 
utility and scarcity. 

A more recent school claims the merit of having discov- 
ered the logical tie that binds these two ideas. It shows 
that they are related and may be reconciled by means of the 
so-called theory of final utility. We shall explain later the 
meaning of this expression. This school of economists has 
returned to the idea of utility. Only, it has demonstrated 
that scarcity, i.e. limitation in quantity, far from being 
independent of utility, and artificially grafted upon it by 
economic theory, is really inseparable from it. As mat he- 



UTILITY 55 

maticians say, each is a " function " of the other ; each has the 
same basis, namely, the fact that wants are limited in intensity. 
This they prove by the following demonstration: — 

When we raise the old objection to the utility theory that 
water is very useful and yet has no value, what do we mean ? 
If we refer to all the water in existence, it is absolutely false 
to maintain that it has no value ; it would possess a great 
value if it were in any one's possession and were put on 
sale. If we refer to the water that happens to be contained 
in a particular glass or pail, we cannot say absolutely that it 
is useless or useful, for that depends on circumstances. 

Let us suppose, for example, that the quantity of water at 
my disposal is contained in seven pails. The first of these 
pails I shall use to still my thirst, and it is therefore very 
useful. The second pail is also useful, although less so, 
because I intend to use it for cooking. The third is still 
less useful, for it serves only for washing. The fourth is for 
my horse, the fifth to water my flowers, and the sixth to wash 
the floor of my kitchen. The seventh pail is of no use 
whatever ; consequently, I make no effort to obtain it. If 
some one should insist on bringing me ten, twenty, or even a 
hundred pails of water, these additional pails would be a posi- 
tive nuisance. Can we now say that a pail of water is use- 
ful or that it is useless ? These pails of water represent a 
long series of varying utilities, ranging from infinity to zero, 
and falling even below zero. Yet every one knows that 
these pails all have the same value. This value is deter- 
mined by the utility of one of them. The question that 
now arises is: Wliich one determines the value of the others ? 
The first ? Or the second ? No, the last ; because the priva- 
tion only of the last pail needed can affect me at all. If 
there are a hundred pails at my disposal, and six pails are 
all I can possibly use, I do not care a whit for what becomes 
of the other ninety-four. But if I have only six pails and 
my reservoir will furnish no more, each of the six pails has a 
certain value. This value, to be sure, cannot be greater 



5Q PRINCIPLES OF POLITICAL ECONOMY 

than that of the sixth pail, because only my inability to use 
this pail will cause me any anxiety. If the first pail should 
by an accident be overturned, should I loudly lament its loss 
and feel bound to die of thirst ? Of course that would be 
absurd. It is evident that I should not go without drinking- 
water, but I should be obliged to use one of the other pails 
in place of the missing one. Now which pail should I sacri- 
fice for this purpose ? "Evidently, the one which is least 
useful to me, — the sixth. This is why the sixth pail deter- 
mines the value of the others. 

Suppose now that my supply of water is abundant enough 
to furnish ten or even twenty pails of water. It is then 
clear that for some of these pails I shall have absolutely no 
need, and their utility for me is zero. At the same time, 
this circumstance reduces the value of all the other pails to 
zero, and this is precisely the actual condition of things as 
regards water in most countries. This fact also explains 
why, according to this theory, value is determined by final 
utility or marginal utility, i.e. the intensity of the last want 
satisfied. 1 

1 This theory may be summarized as follows : — 

Value is determined by subjective utility, which is not the utility of a 
thing in general but its utility for him who possesses it. This utility is not 
the same for each unit possessed, but decreases as the number of units pos- 
sessed increases. The utility of the last unit possessed, i.e. the least useful, 
determines and limits the utility of all the other units. 

Final utility must be distinguished from total utility. The latter consists 
of the sum of utilities of all the pails of water, i.e. of the total of a series 
of decreasing quantities ; it is therefore always much greater than the final 
utility. This circumstance explains why the total utility of water is enor- 
mous although the (final) utility of a pail of water is small. 

The foregoing is true only of water for household purposes. If water is 
used for irrigation or for motive power, it acquires a value — and a consider- 
able one — because for such purposes as this it does not exist in sufficient 
quantity to satisfy the needs of all ; and in this event the thousandth pail or 
the ten-thousandth pail would still have a (final) utility and confer a value 
on the whole quantity. 

In his excellent book, now unfortunately forgotten, on " Le Commerce et le 
Gouvernement," the philosopher Condillac foreshadowed this explanation of 
value and in this respect was more advanced than his contemporaries, the 



UTILITY 57 

This theory is evidently founded on the law that we have 
already stated, viz., that the wants of man are limited in in- 
tensity. It is admirable as a correct and delicate psycho- 
logical analysis of human desires ; but in basing value on a 
single principle it does not appear to have succeeded any 
better than preceding theories. What the theory designates 
as final utility is nothing else than what we have called the 
degree of desirability, i.e. the sum of those elements that 
constitute economic desire. 1 

Among these elements there is especially one that cannot be 
brought into the formulae of this theory, viz., limitation of the 
quantity. This point is, to be sure, implied in the theory by 
regarding the final utility — in mathematical language — as a 
" function " of the quantity. But in this event we must admit 
that the " quantity " is in turn determined by other causes 
more fundamental. If we lived in a world where production 

physiocrats: "The value of things grows by scarcity, and diminishes by 
abundance. Abundance may reduce it to zero. A superabundance of goods 
is always valueless when we cannot make use of the surplus, for then it is 
entirely useless." Franklin put this even more tersely, " When the well is 
dry we know the value of water.' ' 

1 The celebrated theory of final utility outlined above owes its wide ac- 
ceptance primarily to the works of three economists who published it almost 
simultaneously about thirty years ago : Professor Jevons in England, Walras 
in Switzerland, and Karl Menger in Austria. Jevons outlined the doctrine in 
his "Theory of Political Economy," published in 1871, and at almost the 
same time the same doctrine was expounded in French and German by the 
other two authors. There is no reason to believe that any one of these three 
scientists knew anything of the others' work. Each of them regarded his expo- 
sition of the theory as the first and only one. A few years later, however, it 
was discovered that an obscure German author named Gossen had in 1854 for- 
mulated the same doctrine of marginal utility. Still later it was maintained 
that the French economist and engineer Dupuit developed the same theory in 
1844. The honor of its invention has recently been restored to the Germans 
in an essay by C. W. A. Veclitz on " Thuenen's Wertlehre" (Halle, 1896), in 
which the author shows that the final utility theory was clearly foreshadowed, 
if not explicitly stated, by the German economist von Thuenen, who wrote in 
1826. In the United States the principal protagonists of this theory are 
Professor J. B. Clark and Professor S. N. Patten. Its principal advocates 
abroad are Boehm-Bawerk and Wieser, 



58 PRINCIPLES OF POLITICAL ECONOMY 

did not exist ; if, for instance, all the objects that serve onr 
wants fell from heaven like the manna of the Jews, then the 
limitation of the quantity would be a matter of fixed and 
fundamental importance. But in our present economic state 
it is only of relative importance. There is not a thing in the 
world, not even among the products of nature, and certainly 
not among the products of human industry, the quantity of 
which is so rigorously determined that we could not increase 
it by additional effort. When Ave. say that diamonds are rare 
we do not mean that nature has put a specific number of them 
into commerce and then destroyed the means of their pro- 
duction ; we simply mean that it requires much effort or 
great good fortune to find them, and that consequently the 
number of diamonds can be increased only with difficulty. 
When we say that chronometers are rare we do not mean 
that there is in the world only a fixed number of them; for 
we might produce almost any number. But as the manufac- 
ture of a good chronometer requires considerable time and a 
special kind of craftsmanship, the quantity is limited by the 
available time and labor. It would be unsafe, even, to affirm 
that the number of paintings by Raphael is absolutely fixed ; 
for it is not impossible that some day we may discover, hidden 
away in some old attic or church, hitherto unknown works of 
this artist. 

In forming a concept of value, therefore, we cannot neglect 
to consider the means of increasing the quantity of a given 
kind of wealth. There are even cases when the mere possibility 
of voluntarily increasing the quantity is sufficient to diminish 
desire and reduce value. Such a case would be, for example, 
the discovery of a method for crystallizing carbon to produce 
diamonds ; even before the industrial application of this 
method the value of diamonds would fall. 

Finally, this theory, which explains facts very well when 
we have to do with isolated man (like Robinson Crusoe), does 
not explain them when we enter the real world of exchange, 
except by means of complicated abstractions. Indeed, as 



LABOR 59 

values are entirely subjective, a given object has as many 
values as there are buyers and sellers in the market. We 
must therefore still ask : How is a uniform market price 
evolved from this great variety of values ? (See Book III, 
the section on Exchange Value.) 

Section 2. Labor 

The second theory is in a manner the inverse of the first. 
While the first clings to the idea of the gratification afforded 
by goods, the second emphasizes that of the effort made to 
get them. It occupies an important place in the science of 
economics. First developed by Adam Smith, vigorously 
expounded by Ricardo, it has been accepted by economists 
belonging to many different schools — from the optimists 
like Bastiat to the socialists like Karl Marx. 1 

Of course this theory does not deny that utility, i.e. the 
power to satisfy want or desire, is the fundamental condition, 
the sine qua non of value. It would indeed be foolish to sup- 
pose that a useless thing can have any value, whatever may 
be the labor that it has cost. But, according to this school, 
although utility is the condition of value, it is not the cause 
of value. The basis of value, it is claimed by this school, is 
human labor ; and things are worth more or less according 
to the amount of labor required to produce them. 

This theory seems to possess two advantages over the pre- 

1 " It is natural," says Adam Smith, " that what is usually the produce of 
two days' or two hours' labor should be worth double what is usually the 
produce of one day's or one hour's labor." — " Wealth of Nations," Book I, 
Chapter VI. 

Ricardo speaks of labor " as being the foundation of all value, and the 
relative quantity of labor as almost exclusively determining the relative 
value of commodities." — Chapter I, Section 2, "Principles of Political Econ- 
omy and Taxation." 

"The value of a commodity is determined by the quantity of labor 
expended during its production." — Karl Marx, "Capital," Chapter I. 

Despite this apparent identity in the thought of these three writers regard- 
ing value, their explanations of it are at bottom quite different. But we 
cannot here discuss this difference. 



60 PRINCIPLES OF POLITICAL ECONOMY 

ceding one : (1) That of being more scientific, because it 
gives as the basis of value a precise quantitative notion, — 
something that can be measured. To say that a certain 
watch has twice the value of another because it represents 
twice as much labor, satisfies our mind ; the explanation 
seems to be valid ; at all events we can verify it if we choose. 
But to say that it is worth twice as much because it is twice 
as much desired, does not sound clear and convincing ; for 
what do we know about it, and how can we tell ? (2) It 
also satisfies better the idea of justice, because it gives as the 
basis of value a human element, — labor. This is one reason 
why the theory has attracted so many generous-minded men. 
If we could succeed in showing that the value of all things 
that have become some one's property, beginning with the 
soil itself, is directly proportionate to the labor that they 
have cost, it would not necessarily follow that the wealth 
belonging to each person is equivalent to the product of his 
labor 1 (for he may have appropriated value created by the 
labor of others), but the problem of attributing to each per- 
son a value equal to the product of his labor would at least 
be very much simplified ; it would, upon such a theory as 
this, be easier to found our social organization on a principle 
of justice. 

We wish, therefore, that this theory could in truth be 
regarded as the expression of existing conditions. Unfor- 
tunately, the explanation is unsatisfactory, for the following 
reasons : — 

(1) If the cause or essence of the value of a thing con- 
sisted in the labor requisite for its production, then value 
would necessarily be unchangeable, for as Bastiat himself 

1 The optimistic school of economists actually affirms that wealth is propor- 
tionate to labor, and endeavors to show that except for those perturbations, 
exploitations, and thefts that occur even in the most civilized societies, the 
sum of values in any person's possession is the fruit of his labor and saving, 
or of his ancestors' labor and saving. 

The socialists, particularly Karl Marx, claim that all wealth, all capital, is 
the result of a deduction from the product of the labor of others. 



LABOR 61 

admitted, "past labor is not susceptible of a more or less." 
But every one knows that the value of objects varies con- 
stantly. It is evident that these variations are absolutely 
independent of the work of production. Besides, it is a priori 
absurd to think that the value of a commodity may thus de- 
pend on a fact that is irrevocably past. The labor put into 
an object is a matter of the past, and cannot now be changed. 
" What's done, is done." 

To this, of course, the reply may be made that we should 
consider not past labor but present labor, — not the amount 
of labor especially devoted to the particular object that 
we have in mind, but the generic labor necessary under 
existing social conditions to produce an object like it. 1 This 
may be well and true, but there remain other objections more 
difficult to remove. 

(2) If labor were the cause of value, equal labors would 
always correspond to equal values, and unequal values to un- 
equal labor. But we constantly see objects that have cost 

1 The American economist, Henry C. Carey, maintained that the cost of 
"reproduction" determines value. He meant that the actual amount of 
labor expended in making a chair, for example, does not determine its value, 
but the amount of labor that would now be required to make another chair 
just like it, i.e. the cost of again producing such a chair. 

Karl Marx declared that we need not care for the individual labor which 
may have been employed in producing a given object, but for the social labor 
requisite for the production of that object, measured by the number of hours 
necessary, on the average, to produce it. 

Bastiat, to solve the same difficulty, says that we must consider, not the 
labor performed by him who produced the object, but only the labor saved 
to him who seeks to possess it. And as helping some one to avoid labor is, 
according to Bastiat, to " render him a service," this author defines value as 
"the relation between two services exchanged," and declares that the cause 
and measure of value is the service rendered. This idea, by which social 
relations are regarded as an exchange of services, is both very ingenious and 
very modern, but as an explanation of value it amounts to mere tautology. 
To the question, Why is a diamond more valuable than a pebble ? it replies. 
Because in giving me a diamond you render me a greater service than in giv- 
ing me a pebble. No one would gainsay so puerile a proposition ; but it is 
sufficient to reply that if the service rendered by the transfer of a diamond 
is greater than that rendered by giving up a pebble, this is simply because 



62 PRINCIPLES OF POLITICAL ECONOMY 

the same amount of labor selling at different prices: for 
example, tAvo pieces of meat from different parts of the same 
cow. On the other hand, objects which have cost different 
amounts of labor are sold at the same price : for example, 
a bushel of wheat from land that produces ten bushels an 
acre, and a bushel of the same quality from land that pro- 
duces thirty an acre. 

The phenomenon known to political economists by the 
name of re?it is nothing else than the excess of the selling 
price of an article over its cost of production, i.e. its cost in 
labor. Now rent exists everywhere, more or less. 1 

(3) If labor were the cause of value, value would be 
absent where labor is absent. But there are innumerable 
things that have a value of their own without the interven- 
tion of labor, e.g. springs of mineral water or of petroleum, 
guano deposited by sea-fowl, sandy beaches that are particu- 
larly valuable for planting vineyards, building lots on the 
prominent streets of large cities, etc. 2 There are also things 
that acquire an increased value without the addition of any 
labor, e.g. wine that has been stored in wine-cellars. 

the diamond has more value than the pebble. Thus we have reasoned in a 
circle. As a matter of fact, it is not the service rendered by him who yields 
an object, that determines its value, but, on the contrary, it is the value of 
the object yielded, that determines and measures the service rendered. 

It should be noted that to the very extent that these amendments correct 
the fundamental "labor" theory, they also deprive it of the merit of satisfy- 
ing our ideal of justice. The theory of value and our ideal of justice would be 
in perfect harmony if we could prove that the value of any object in a per- 
son's possession is proportionate to the trouble that was required of its pos- 
sessor to produce it. But this harmony no longer exists if we limit ourselves, 
like Bastiat, to proving that value is simply proportionate to the trouble 
saved (i.e. not incurred), or if, like Karl Marx, we measure value by average 
labor (which is independent of individual labor). 

1 Ricardo did not deny rent. It was he who discovered it for land. The 
explanation he gives of it serves but to emphasize the fact that two objects of 
the same quality, i.e. the same utility, have necessarily the same value how- 
ever unequal may be the labor they have cost. 

2 Ricardo did not deny the indubitable fact that there are objects " whose 
value depends only on scarcity, because no labor can increase their quantity." 



LABOR 63 

(4) Finally, and above all, if labor is the cause of value, 
what is then the cause of the value of labor itself ? For labor 
has an incontestable value ; it is bought and sold, or rather, 
it is hired every day at a certain price. It is easy to explain 
the value of labor by the value of its product, just as the 
value of a farm is determined by the value of its crops. But 
if in turn we pretend to explain the value of a product by 
the value of the labor which produced it, we are reasoning 
in a circle. 

The above theories are the two important explanations of 
economic value. We must choose between them, — unless 
we care to adopt them both. Indeed, I believe that this is 
just what we are obliged to do, not for the sake of eclecti- 
cism, but because we thus approach nearer to the truth. 
The human mind is naturally disposed to seek a single cause 
for the phenomena under study; but is it not reasonable 
to suppose that value has two sides, two poles as it were, each 
of which contains a part of the truth — utility as well as 
labor, pleasure as well as pain ? 

Let us ask ourselves these questions: — Why do we attrib- 
ute a certain value to a given object ? Why do we want a 
given object? A little reflection will suffice to show that two 
different, and in a sense opposite, answers may be given to 
these questions. We may place a value upon things because 
they afford us pleasure, or we may do so because they have 
cost us some expenditure of effort or pains. ■ Even an isolated 
man like Robinson Crusoe certainly did not classify the 
objects he possessed solely according to the satisfaction 
he anticipated from their possession. He had also another 
criterion of value, viz., the difficulty he would encounter in 
replacing these objects. Probably the utility of his watch 

But he considered them insignificant exceptions to the rule, and gave as 
typical examples : valuable paintings and statues. The objects, however, 
which have a scarcity-value constitute a class of exceptions that is more 
important than the rule. 



64 PRINCIPLES OF POLITICAL ECONOMY 

was small, for as he lived alone and had no engagements to 
fulfil he needed it little ; but as he knew that it would 
be impossible for him to replace it, he doubtless attributed a 
greater value to it than it would otherwise have possessed. 
There is consequently all the more reason why we, who are 
living in a society and who are interested in values princi- 
pally for purposes of exchange, cannot ignore this matter of 
pain or cost. As sellers we must think of the difficulty 
of replacing the object that we relinquish. As purchasers 
we are concerned with the difficulty of procuring the object 
that we want. 1 

In summarizing our answer to the question, What is the 
cause of value ? we cannot assign one exclusive cause, for 
there are more than one ; but we may say : — 

Things have more or less value according to the intensity of 
our desire for them. 

The intensity of our desire for things varies according to the 
insufficiency of their quantity for the satisfaction of our wants. 

The quantity of things is more or less insufficient, according 
to the difficulty we experience in increasing it. 

IX. What is Price? 

To obtain a definite idea of the size, the weight, or the 
value of things, it is not sufficient to compare them with 
one another. A common measure is necessary. For meas- 
uring lengths the term of comparison was originally a part 
of the body (foot, ell, etc.), and is now, according to the 
" metric system " introduced first in France, a part of the 
earth's circumference (the meter, kilometer, etc.). For 
measuring weights the term of comparison chosen in the 

1 Professor Marshall declares that value is determined both by the final 
utility and by the cost of production ; value ' ' maintains an equilibrium 
between these two opposite forces, like the keystone of an arch." 

Ruskin says that value is the product of two factors, one of which is labor, 
x, and the other the demand, y. "Whence, if x or y equals 0, then the value, 
xy, also equals 0. (" Unto This Last.") 



WHAT IS PRICE? 65 

metric system is the weight of a fixed volume of distilled 
water. The old or original English pound was derived 
from the weight of 7680 grains of wheat, all taken from the 
middle of the ears and well dried ; hence " grains " form the 
lowest fractional parts of a pound. The standard British 
pound at present is a piece of platinum preserved in the 
office of the Exchequer, at the temperature of 62° Fahr. A 
number of authorized copies of it have been made and de- 
posited at several institutions. The yard, as the standard 
English measure of length, is the distance between two 
marks on a metal rod imbedded in the masonry of the 
Houses of Parliament. 

A common measure enables us to compare two things in 
different places (which cannot be brought together for direct 
comparison), or to compare the same thing at different times 
in order to ascertain what changes have taken place in it. 
By means of the yard-measure we can compare the stature 
of the Lapps with that of the Patagonians, and tell exactly 
how much taller the former are than the latter. The same 
standard of comparison, if it has not been entirely forgotten, 
in a thousand years will enable our descendants to compare 
themselves with the man of to-day and ascertain whether or 
not mankind has decreased in stature. 

In order to measure value it is not sufficient for us to com- 
pare two values one with another (as is done in barter), but 
we must take the value of some definite object as a basis of 
comparison. But which object shall we choose ? Each 
nation and every period seems to have had its own measure 
of value. Homer declared that the armor of Diomedes was 
worth a hundred oxen. Until a few years ago, a Japanese 
would have said that it was worth so many hundredweight 
of rice. An African negro would have put its value in 
yards of colored calico, and a Canadian trapper would have 
expressed it in fox-skins or otter-skins. It is, nevertheless, 
a remarkable fact that almost all civilized people have agreed 
in choosing as their measure of values, as their standard, the 



66 PRINCIPLES OF POLITICAL ECONOMY 

value of the precious metals, gold, silver, and copper, but 
especially the first two. They all use a little ingot of gold 
or silver, called a dollar, or pound, or franc, or rouble. To 
measure the value of any object, they compare it with the 
value of that small weight of gold or silver that serves as the 
monetary unit ; that is to say, they try to find how many 
of these bits of metal must be given up for the commodity 
in question. If, for instance, ten are needed, they say that 
the commodity is worth ten dollars, or ten pounds, etc. 
That is its price. 

The price of a thing is, therefore, the expression of the 
relation between the value of the thing and the value of a 
certain weight of gold or silver ; or, to put it more briefly, 
it is its value expressed in money. As in all civilized coun- 
tries money is the sole customary measure of values, the 
term "price" has come to be synonymous with " value." 

Why have the precious metals been chosen as the common 
measure of values ? Because they possess two properties 
that enable them to fulfil this function admirably, or, at all 
events, better than any other known object. These two 
properties are : (1) Great value in small bulk, which makes 
them very easily transportable ; (2) A degree of chemical un- 
changeableness that guarantees almost unlimited durability . 
By virtue of the first of these properties the value of precious 
metals is of all values that which varies least from one place 
to another. By virtue of the second quality the value of 
these metals varies least from one year to another. This 
double invariability, relatively speaking, in time and in 
space, is the essential condition of every good measure. Yet 
we shall see (in the section on Money) that when we take 
long periods of time into consideration — not centuries, but 
even generations — this chosen measure is found to be very 
defective. Can we find a better one ? Several have been 
proposed, the principal one being wheat. This seems a most 
astounding choice ; for if we consider the value of this com- 
modity in different places or at different times we find that 



WHAT IS PRICE ? 67 

there are few goods whose variations in value are more 
marked. At a given time a bushel of wheat may sell for 
$2 in France, $1 in London, and 50 cents in one of our 
western states ; and from year to year the value of crops 
varies greatly, according as they are good or bad. 

To this the reply is made that though the value of wheat 
is incomparably more variable than that of the precious 
metals when only short spaces of time are considered, yet it 
is far more stable when longer periods are observed. Wheat 
satisfies a physiological need that is permanent and varies 
little. No other commodity (at least in civilized societies) 
possesses to the same degree the double characteristic of 
being almost indispensable up to a certain limit, determined 
by the quantity necessary to nourish a person, and of being 
almost entirely useless beyond this limit, — since no one 
cares to consume more than his hunger demands. Hence, 
despite the sudden and wide oscillations in its production, 
the law of demand and supply tends always to restore its 
value to a level determined by physiological need ; it does 
this, moreover, with greater effectiveness whenever pro- 
duction has temporarily deviated from its proper level. 

It must be acknowledged that wheat does offer, so far as 
variations in value are concerned, virtues and defects that 
are precisely the opposite of those which mark the precious 
metals. For this reason it has often been used by statisti- 
cians as a good basis on which to estimate the cost of living 
at various periods. 

A better measure, it appears, would be labor. In fact it 
may be maintained that men will be willing to devote more 
labor to making a thing when the thing is greatly desired, 
or, in other words, when they believe it to possess greater 
value. Just as in exchange we measure the value of a com- 
modity by the sacrifice of some other commodity which some 
one is disposed to make in order to procure it (for instance, 
by the amount of money which the purchaser will yield for 
it); similarly, may we not measure its value by the amount 



68 PRINCIPLES OF POLITICAL ECONOMY 

of time and trouble which men will devote to its produc- 
tion ? It is in this sense that Adam Smith said, " Labor 
was the first price, the original purchase-money that was 
paid for all things." 2 

What we really want to find is a practical and convenient 
measure. How, then, can we take labor as a measure, since 
it is never the same for two persons, and varies continually 
in intensity and in quality ? 

It has also been suggested to take, as the common measure 
of value, the wages of a workman of the lowest class, — of a 
manual laborer who earns just enough to live. This meas- 
ure is proposed on the supposition that the amount neces- 
sary to keep a man alive is a fixed, definite quantity. But 
we need only refer to what has been said concerning the 
wants of man to be convinced that this supposition is en- 
tirely contrary to facts. 

Hence we conclude that, for want of something better, we 
must be satisfied to use gold and silver as the measure of 
value, and to express prices in money. 

1 This theory must not be confounded with that of Karl Marx, by which 
labor is regarded as the cause of value, — a doctrine which we have already 
rejected. Here we are considering labor not as the cause but as the effect of 
value, or rather as the effect of desire, since desire gives rise to value. If 
we admit that labor is an effect of value, nothing would be more scientific 
than to measure the cause by the effect. We measure weight by the pen- 
dulum much better than with scales, for scales permit us only to compare 
weights — as exchange enables us to compare only values — while the pendu- 
lum measures the intensity of weight itself. If we could measure value by 
labor, we should then be able to tell whether in a few centuries the economic 
desires of mankind are more or less intense than to-day. 



BOOK II. PEODUCTION 



PART I. THE FACTORS OF PRODUCTION 

Thanks to a tradition dating from the time of the first 
economists, three agents of production have always been dis- 
tinguished: land, labor, and capital. This threefold division 
has the advantage of simplicity, and there seems to be no 
need to abandon it, — at least not in an elementary book like 
this. 

It requires, however, some correction. Classical political 
economy has always shown an unfortunate tendency to re- 
gard these three factors as equally important. This ten- 
dency was doubtless due to a desire to justify the claims of 
each in the ultimate distribution of products, by attributing 
wages to the laborer, rent to the owner of land,, and profit to 
the owner of capital. But we must abandon any such effort 
as unscientific. Here we have to do only with production, 
and from this point of view it is at once evident that these 
three factors play unequal parts. Of the three, labor is the 
only one that can claim to be an agent of production in the 
exact sense of the word. Only man plays an active part in 
production ; nature is absolutely passive, and merely obeys 
man, often after long resistance. Nevertheless, whenever 
we have to do with material wealth, nature is indispensable 
to production. 1 It may be called, therefore, a factor of pro- 

1 When we are considering non-material products, or services (see p. 48), 
it is plain that human labor is sufficient, — unless we maintain, with a cer- 
tain degree of subtilty, that these services can be transmitted only through 
the medium of natural agents ; the song of a singer, the advice of a physician, 
can, to be sure, reach our ears only by means of sonorous air vibrations. 

69 



70 PRINCIPLES OF POLITICAL ECONOMY 

duction, for it is not only a necessary concomitant of labor, 
but must exist before labor. The activity of man ac- 
complishes nothing in a vacuum ; it does not really create, 
but must find in the outside world those indispensable ma- 
terials on which it operates. These materials are furnished 
by nature. The third factor, capital, also plays a purely 
passive part, and therefore should not be called a productive 
agent. It is not even a primary factor of production ; it is 
only a factor of secondary importance. Logically, as well as 
chronologically, it is derived from the two others. Capital, 
as we shall explain in detail later, is a product of labor and 
of nature, set aside for productive purposes. Its right name 
is "instrument" of production, in the wide sense of the 
term. 1 

1 The classical economists generally designated as profits the share of the 
capitalist in the distribution of goods. But modern economists have confined 
this term to the remuneration received by the industrial projector, and have 
used the term interest to designate the share due to capital. It is the indus- 
trial projector who directs production by uniting the requisite land, labor, 
and capital ; it is he, moreover, who is directly responsible for the outcome. 
(See the Chapter on Profits.) 



CHAPTER I— LABOR 

I. On the Part played by Labor in Production 

To accomplish its purposes, and principally to obtain the 
necessities of existence, every organism must perform work. 
The seed must work its way through the hardened crust of 
earth. The oyster, clinging to its bed, opens and closes its 
shell to draw nourishment from the water. The spider spins 
its web ; the wolf hunts its prey. Nor is man exempt from 
this universal law ; he too has to toil to satisfy his wants. 
With plants this toil or striving is unconscious ; with ani- 
mals it is instinctive ; with man it is a voluntary, conscious 
act, called labor. 

But is there not some wealth that man can obtain without 
work, — wealth that nature lavishly bestows on him ? This 
is a difficult question. First of all it must be observed that 
there is not a single object among those that are called prod- 
ucts that does not in some measure presuppose the inter- 
vention of labor. The word product (productum), which 
means " drawn from somewhere," implies this. But what, 
except the hand of man, could have performed this draw- 
ing or producing ? Even the fruits which nature has given 
man, he must take the trouble to gather. This is labor, 
and under some circumstances exceedingly arduous labor. 

People seldom realize what an important part labor plays 
even in those products that are often inaccurately termed 
"natural." They are too ready to believe that everything 
that grows on the earth is due to the generosity of nature. 
As a matter of fact, nearly all the plants that supply man 
with food have been so modified by cultivation and by the 
labor of hundreds of generations, that botanists can seldom 

71 



72 PRINCIPLES OF POLITICAL ECONOMY 

discover their original types. Wheat, maize, and beans have 
been found nowhere in the wild state. Even such plants 
as do grow wild are wonderfully different from their culti- 
vated congeners. Between the acid berries of the wild vine 
and our grapes, between the succulent fruits of our gardens 
and the bitter or even poisonous wild-fruit, there is a vast 
difference ; so great, indeed, that our fruits may be regarded 
as artificial products, that is to say, as creations of human 
industry. A proof of this is the fact that if the constant 
labor of cultivation be relaxed for a few years, these prod- 
ucts speedily degenerate, i.e. they revert to a state of nature 
and lose all those properties with which human industry 
had endowed them. 

It is true, however, that some wealth is not the product of 
labor, precisely because it is not a product ; i.e. it exists before 
any act of production. I refer to the soil and all the organic 
objects or inorganic substances with which it supplies us, — the 
bubbling spring of water or petroleum, the growing forest, 
the natural prairie, the stone-quarry, the coal or metal mine, 
the waterfall that turns the mill-wheel, the guano bed de- 
posited by sea-birds, or the sea teeming with fish. 

Yet, to understand the part played by labor even in this 
" unproduced " wealth, we must bear in mind two points : — 

(1) This natural wealth does not exist, as wealth, i.e. as use- 
ful and valuable objects, until human intelligence has been 
able, first, to discover its existence, and, secondly, to per- 
ceive that it possesses qualities which render it fit to satisfy 
some of our wants. Take any piece of land, say wheat- 
growing land in America. Why is this land wealth ? Be- 
cause some explorer or pioneer, following in the footsteps of 
Columbus, discovered this particular spot. Now discovery, 
whether of a new world or merely of mushrooms in the forest, 
always presupposes labor of some kind. 

(2) Natural wealth cannot be utilized, i.e. cannot be made 
to serve for the satisfaction of human wants, until it has 
undergone a certain amount of labor. In the case of virgin 



LABOR 73 

soil, it is necessary to clear it of trees and underbrush. In 
the case of a mineral spring, it must be made possible to col- 
lect and store the water. Even mushrooms and fish must 
be gathered or caught and then prepared for use by cooking. 

II. How Labor Produces 

We must distinguish three varieties of labor : — 
(1) Manual labor. When we consider the infinite variety 
of products which result from human industry we are likely 
to suppose that labor is a very complex power which defies 
all analysis. Yet it is nothing of the sort. Labor is noth- 
ing more than muscular energy directed by intelligence. It 
cannot produce any other effects than those of any motive 
force — a weak motive force — viz., a movement or change of 
place. This movement may be a displacement of the object 
itself, or of its component parts. In the latter case we say 
that there is a change of form — a transformation — but every 
change of form is really only a displacement. The exquisite 
shapes assumed by clay under the hand of the potter or the 
statuary, the rich and ingenious patterns wrought in lace by 
the fingers of the lace-maker, are only the effects of the 
arrangement or displacement of molecules of clay or threads 
of tissue. All that man's labor can do is to stir, separate, 
connect, insert, superpose, and arrange ; all these are only 
different kinds of motion and transposition. Take the vari- 
ous processes in the production of bread : ploughing, sow- 
ing, reaping, winnowing, grinding, sifting, kneading, baking, 
— these are nothing but movements of matter. Analyze any 
industry, and no other factor can be found, for this is the 
only part man plays in the work of production and is the 
limit of his power. All the profound transformations that 
take place in the constitution of matter, changes which modify 
its physical or chemical properties and help in production; the 
mysterious evolution of a plant from its seed ; the fermen- 
tation that turns a sugary syrup into alcohol; the chemical 



74 PRINCIPLES OF POLITICAL ECONOMY 

process that transforms carbon and iron into steel ; — these 
are not man's work. All he does is to put the proper mate- 
rials in the right place, the seed in the ground, the vintage in 
the vat, the ore in the furnace. Nature does the rest. 

When we consider how feeble, relatively, this motive 
power of man is, and how limited its field of action, we are 
astounded that it has nevertheless been potent enough to 
transform the world. 

(2) All physical labor, properly so called, must be preceded 
by purely intellectual labor which we may call invention. It 
is because of discovery and invention that the patrimony of 
mankind is increased every day by some new conquest. 
From the soil that makes the mud of our streets we have 
learned to manufacture aluminum ; industry has converted 
the apparently worthless residue of coal into perfumes or 
into dyes more splendid than Tyrian purple. Yet the list of 
things which we know how to utilize is short when com- 
pared with the immense number of those that serve no 
human use. Of the 140,000 known varieties of the vege- 
table kingdom, we have learned to cultivate and use less than 
300. Of the hundreds of thousands of species in the animal 
kingdom, there are barely 200 that we employ for any pur- 
pose whatever. In the inorganic world the proportion is 
even more unfavorable. But the list of our riches is every 
day being lengthened, and there is every reason to believe 
that if our science were perfect there would not be a single 
blade of grass or a grain of sand for which we had not dis- 
covered some use. 

Invention does not mean, as might be believed, the rare 
idea that springs from the mind of a man of genius ; it is a 
requisite of every productive act, even the most humble. 
There is no movement of the arms or fingers in any produc- 
tive act that was not invented by some one. 

It should be noted that every invention, once made, may 
serve for an indefinite number of productive acts, or acts of 
reproduction. It is precisely this possibility which makes > 



LABOR 75 

it difficult for the law to protect the property rights of 
inventors. 

(3) Finally, it must be remembered that all collective labor 
{i.e. all labor, save when a man works alone and for him- 
self ) requires direction or supervision. Each laborer in a 
productive enterprise is not allowed to do as he pleases, in- 
dependently of each other laborer ; he must be told what to 
do, according to a general plan. This planning or directing 
is itself a very effective kind of labor, the importance of 
which increases as production is conducted on an increasingly 
large scale. Misdirected labor is apt to be valueless ; hence 
the labor of intelligent direction is a value-creating function. 

III. The Evolution of Ideas concerning the Productivity of 

Labor 

It is interesting to follow the succession of economic doc- 
trines regarding this problem of the productivity of various 
kinds of labor. The title of " productive," originally ap- 
plied to only one kind of labor, has gradually been extended 
in its application, and is now bestowed on all kinds without 
exception. 

(1) The physiocrats confined the epithet "productive" to 
agricultural labor (including hunting, fishing, and mining, as 
similar in nature), and denied it to all other labor, even that 
of manufacturing. The reason assigned for this discrimi- 
nation was that the above-named pursuits furnish all the 
materials for wealth, while other occupations simply work 
up these materials. 

(2) The definition of the physiocrats was unquestionably 
too narrow. The raw product of agriculture and of mining 
is usually altogether unfit for consumption ; it must undergo 
numerous modifications which are effected by manufacturing 
industries. The latter are the indispensable complement of 
farming, and without it the process of production is as incom- 
plete as a play with the last act suppressed. Of what use 



76 PRINCIPLES OF POLITICAL ECONOMY 

is the ore at the mouth of the mine, unless it is destined 
to go to the foundry ? Of what use is wheat before it has 
passed through the hands of the miller and the baker ? With- 
out the weaver's labor flax would be as useless as the nettle. 
How then can we refuse to call these labors productive ? 
Without them all these kinds of wealth would be useless to 
us ; in other words, they would not be wealth at all. 

As for the contention that agriculture and mining create 
wealth, and that manufacture or industry in the narrower 
sense of the term only transforms it, we must call this an 
error. The farmer creates nothing ; he too simply trans- 
forms the elements that are contained in the soil and air. 
He makes wheat from water, potassium, silicon, phosphates, 
and nitrogen, just as the soap-maker manufactures soap from 
soda and fatty substances. 

Therefore, ever since Adam Smith wrote on this subject, 
no one has hesitated to regard manufacturing as productive 
labor. 

(3) With regard to the labor of transportation there has 
been more hesitation, because transportation seems to make 
no change whatever in the article transported. Is not a 
package of goods the same when sent from New York as 
when it reaches San Francisco ? This feature of identity, it 
was urged, distinguishes transportation from manufacturing. 

But the distinction is scarcely philosophical, since every 
displacement involves an essential modification of bodies. 
Indeed, it is the only modification that we can make in 
matter. Besides, if we decide that displacement is not 
essential enough a modification to entitle it to be called pro- 
ductive, then we cannot call mining productive either. For 
what distinction is there between the work of the miner, who 
transports coal from beneath the earth to its surface, and 
that of the wagoner who takes it away to such places as re- 
quire it, unless we pretend that displacement is productive 
only when it takes place vertically, and not so when it takes 
place horizontally ? It is scarcely necessary to add that just 



LABOR 77 

as manufacture is the indispensable complement of agricul- 
ture and mining, so transportation is the complement of the 
preceding operations. What would be the use of stripping 
bark in the Brazilian forests, of extracting guano in the 
Peruvian islands, of hunting elephants in South Africa for 
their tusks, if there was no one to transport these products 
to the places where they are needed ? What profits it a 
farmer to have the finest crop in the world, if there is no way 
to carry it to the consumers ? 

(4) With regard to commerce or trade., the hesitation has 
been even longer. It may be said that commerce or trade, 
reduced to its simplest terms, i.e. buying for the purpose of 
selling, does not imply any creation of wealth. No doubt 
those who engage in trade may make much money, but this 
does not augment the general wealth. In fact we shall see 
that the multiplication of traders and middlemen may become 
a veritable social scourge, and even involve a loss of wealth 
for the community. 

But we must observe, on the other hand, that commerce 
cannot very well be separated from transportation. It was 
at a late period in the history of economic science that these 
two operations came to be distinguished. Even to-day, 
merchants are still the real directors of transportation ; the 
carrying industries only execute their bidding. Moreover, 
they also preserve and store up goods, and sometimes even 
subject them to slight modifications. The cloth merchant 
cuts his goods into conveniently-sized pieces ; the grocer 
roasts his coffee. Finally, even when commerce is nothing 
more than exchange pure and simple, the mere act of trans- 
ferring a thing to the person who will utilize it must be 
regarded as productive ; for to make useful a thing that was 
not useful before, is the whole secret of productiveness. 

(5) Finally, discussion has been keenest with regard to 
services, such as those rendered by the liberal professions. It 
may seem strange, for instance, to apply the term " productive " 
to the labor of the judge who gives a decision, or of the sur- 



78 PRINCIPLES OF POLITICAL ECONOMY 

geon who amputates a leg. Where are their " products " ? 
Where is the " wealth " that they have produced ? 

It is sufficient, however, to note two facts in this connec- 
tion: (a) That production has for its direct object the satis- 
faction of human wants, and only indirectly the creation of 
wealth. The fact that an act of man may satisfy the wants 
of his fellow-men directly, without the intervention of 
wealth, that is, without the use of any material objects, 
should not rob it of its productive character; (7>) that in the 
social organism, thanks to the law of the division of labor 
which we shall explain later, there is such a solidarity and 
interdependence in the labors of men that it is not possible 
to separate them, and immaterial services are an indispen- 
sable condition of the production of all material wealth. 

Take the production of bread. We need not hesitate 
about classing as productive the labor of ploughmen, sowers, 
reapers, wagoners, railroad employees, millers, and bakers, 
beginning with Triptolemus, the legendary inventor of wheat, 
and including all his successors who have discovered any of 
the varieties of cereals or who have invented the rotation of 
crops or the methods of improved agriculture. But we can- 
not stop at mere manual labor, strictly speaking. It is 
clear that the labor of the superintendent or of the landlord, 
although he may not himself put his hand to the plough, 
is as important for the production of wheat as the labor of 
the shepherd in the production of wool, although he may 
not shear the sheep himself. Nor can we ignore the work of 
the engineer, who devises the system of irrigation used on 
the farm, or that of the architects and builders who have 
constructed the farmhouses and the barns. 

Must we stop here ? If we do, what is to be said of the 
labor of the constable who keeps off the tramps, or the 
county attorney who prosecutes them, or the justice who sen- 
tences them, or the soldier who protects the harvest from 
foreign invaders that are even more dangerous than native 
thieves ? Do they not also contribute to the production of 



LABOR 79 

wheat ? And what must be said of the work of those who 
trained the farmer and his employees, the instructor who 
taught them the first principles of agriculture or the means 
of acquiring them, and the doctor who keeps them in good 
health ? Is it a matter of indifference, even from the view- 
point of wheat-production, whether or not the laborers are 
well-instructed and healthy, and that they enjoy the advan- 
tages of social order, security, good government, and good 
laws ? Should we disregard, as of no importance in the pro- 
duction of wheat, even such apparently alien labors as those 
of authors, poets, and artists ? May not the taste for farming 
be developed by novelists who depict the beauties of rustic 
life, or by poets who celebrate the pleasures of the country, 
and teach us to repeat, after the author of the " Georgics," 

Fortunatos niraium sua si bona norint 
Agricolas ! 

Where, then, should the line be drawn ? Productive 
labor has been extended to the farthest bounds of society, 
like the concentric circles made by throwing a stone in a 
pond. Undoubtedly, the various kinds of labor we have 
enumerated do not contribute in just the same way to the 
production of wheat ; some act directly, others indirectly ; 
but none of them, beginning with the ploughman's toil and 
reaching to the work of the President, could be suppressed 
without affecting the raising of wheats 

There is even no necessity for determining which of these 
labors is most useful economically. According to the order 
of importance of the wants that they supply, we might be in- 
clined to put at the top of the list the work of discovery and 
invention, then farming, then manufacturing, transportation, 
and last of all commerce and public services. But it should 
immediately be objected that if a country is poorly governed, 
or if it has no means of transportation, all its agricultural 
wealth is of no avail. What we need is a proper coordination 
of these various productive functions and labors. Unfortu- 



80 PRINCIPLES OF POLITICAL ECONOMY 

nately this perfect coordination is far from realized even in 
civilized societies. Some nations expend millions for the de- 
velopment of means of transportation without first ascertain- 
ing whether there will be any products to transport. Again, 
the number of persons engaged in petty trade or employed 
in government offices is increasing every day, while agri- 
culture is being more and more abandoned. 1 

IV. Pain as a Factor of Labor 

All productive labor involves toil. This is a law of su- 
preme importance in political economy. If labor did not 
involve unpleasantness, all economic phenomena would be 
entirely different from what they now are. If men worked 
only for pleasure, it would no longer be necessary to have 
private property as a stimulus to toil, and the most serious 
objection to communism would lose its force. Fourier, the 
socialist, understood this perfectly. The basis of his scheme 
of a future society was to make labor attractive. He insisted 
that labor was painful solely because of our defective social 
organization ; he boasted that in his " phalanstery " labor 
would be made attractive to all persons by having the 
choice of occupations free, by changing them frequently, 
by working only a short time, by an appeal to the spirit of 
emulation, and by a hundred other devices, some of which 
are ingenious and some fantastic. He proposed to make 

1 The recent census figures regarding the number of persons engaged in 
gainful occupations show the following distribution : — 

1870 1880 1890 1900 

Agriculture, fisheries, mining 49% 46% 40% 38% 

Manufactures . 20 20 22 22 

Commerce and transportation 10 11 15 16 

Liberal professions .........3 3 4 4 

Personal service 18 20 19 20 

This table indicates that the number engaged in the first two groups, 
which are the only directly productive ones, has fallen from 69 to 60 per cent, 
in 30 years ; while the number of the other three groups, which are unpro- 
ductive in the old acceptation of the term, has risen from 31 to 40 per cent. 



LABOR 81 

the work of the farmer, the smith, the carpenter, the shoe- 
maker, etc., just so many kinds of sport. There is really noth- 
ing absurd about this. Labor is after all only a form of 
human activity, and activity is not necessarily painful. To 
act is to live ; absolute inaction is a torture, so cruel that 
when prolonged in solitary confinement it may cause insanity 
or death. There is no essential difference between labor and 
a host of exercises that are regarded as pleasures, though they 
often require a greater expenditure of energy than that in- 
volved in labor ; for example, mountaineering, boating, gar- 
dening, and dancing. King Louis XVI found amusement 
in making locks. Why should not all men work for the love 
of it? 

The answer is that man finds pleasure in action only in 
so far as the exercise of this activity is itself a gratification 
and the performance of a natural function. But when it 
is viewed as the condition of an ulterior enjoyment, — as 
the effort which must be made to achieve an aim fixed before- 
hand (and this is the very essence of labor), — then it becomes 
disagreeable. Between a man who rows for pleasure and a 
boatman who rows to earn a living, between a tourist who 
climbs a mountain and the guide who accompanies him, 
between a girl who spends her evening at a ball and the 
dancer who appears in a ballet, I see only one difference — 
the first rows, climbs, or dances, solely to row, climb, or 
dance, while the others do so to earn their living. This dif- 
ference, though a purely subjective one, causes the same 
kinds of activity to be regarded by the latter as labor and 
by the former as pleasure. Some men find their pleasure in 
gardening ; but they would find it less agreeable if they 
were obliged to raise vegetables for sale in the market. The 
man who follows a road for a walk may take pleasure in this 
activity even though the road may not be particularly attrac- 
tive ; but the man who must traverse it every morning and 
every evening to reach his destination always finds it long 
and wearisome. Now labor is the path that almost all man- 



82 PRINCIPLES OF POLITICAL ECONOMY 

kind must follow in order to earn a livelihood ; hence, in 
accordance with the old curse in Genesis, " they labor in the 
sweat of their brow." 1 Doubtless even the humblest labor 
has its joys, the joys of a duty fulfilled and a natural law 
voluntarily accepted ; but these austere joys are felt only by 
a chosen few, and we should fall into the most chimerical 
optimism if we believed that a change of environment and of 
social organization would some day lead all men to labor 
solely for pleasure. 

In order to induce men to work, and in order to counter- 
balance the unpleasantness always associated with toil, a 
motive of some kind is needed. Formerly, when work was 
done by slaves, the whip, i.e. constraint, furnished the incen- 
tive. For the altruist of the future, the sense of a social 
duty voluntarily performed will perhaps be sufficient. But 
for the man of to-day as a general rule the motive is self- 
interest. Every man who labors is subjected to the influence 
of two opposing forces. On the one hand is the desire to 
procure enjoyment or the means of obtaining enjoyment ; on 
the other is the dislike for work, or rather for the unpleas- 
antness of work. According as one of these desires out- 
weighs the other, man will continue or will abandon his 
labor. 

As Professor Stanley Jevons ingeniously observes, the pain 
endured by the worker increases with the continuation of 
labor, while the pleasure derived from the reward of labor 
constantly diminishes as the more pressing wants are satis- 

1 Socialists and anarchists have bitterly condemned the Bible for repre- 
senting labor as something humiliating and infamous, as the consequence of 
the Fall, and as a kind of punishment. They are evidently not very familiar 
with the text. In reality, the. Bible represents God Himself as the first of 
workers, since He wrought six days and rested the seventh. The institution 
of a day of rest (which presupposes labor) dates before the Fall. Man, we 
are expressly told, was placed in the Garden of Eden " to cultivate it." 

The doctrine taught by the Bible is this : In the world as made by the 
Creator work was attractive ; but evil having entered it through the fault of 
man, labor lost the character of joyous and vivifying activity, which had 
previously been attached to it by the will of God. 



LABOR 83 

fied. Of the two desires, one prompting him to work, the 
other urging him to stop, it is clear that the latter must 
triumph eventually. Take a laborer drawing buckets of 
water from a well. Fatigue increases with each successive 
bucket he has to draw. The utility, moreover, of each suc- 
cessive bucket decreases ; the first of them probably is neces- 
sary for drinking and cooking, the second serves for watering 
cattle, the third for cleaning, the fourth for watering the 
garden, the fifth for sprinkling the road. At which number 
will he stop ? This depends partly on his power of support- 
ing fatigue, but chiefly on the number and intensity of his 
wants. The Esquimau, who uses water only to quench thirst, 
will stop at the first or second bucket ; but the Dutchman, 
who cleans his house from roof to cellar, may have to draw 
fifty buckets before he thinks he has enough water. 

If in addition to the stimulus of present and actual wants 
there is also that of future wants, — if, for instance, in 
a land where water is scarce the worker thinks of filling a 
well in anticipation of days of drought — productive activity 
is greatly increased. But the disposition to compare imme- 
diate toil with remote gratification — a faculty which is called 
foresight — belongs only to civilized races, and, among these, 
only to the wealthier classes. The savage and the poor are 
equally improvident. 

V. Time as a Factor of Labor 

All labor not only involves a certain amount of displeas- 
ure, but also requires a certain amount of time. Between 
the time when labor begins and the time when it produces 
the anticipated results, a shorter or longer period must 
necessarily intervene. This is one of the essential condi- 
tions of all production, a condition that is absolutely general. 
Nature herself is subject to it : long months pass by before 
the seed slumbering in the soil is transformed into wheat, 
and many years are required to change the acorn into the 
sturdy oak. 



84: PRINCIPLES OF POLITICAL ECONOMY 

As a general rule the time of waiting is proportionate 
to the productiveness of the enterprise. Labors that furnish 
man with only a day's food, enabling him to live " from 
hand to mouth," — such labors as fishing or hunting or 
gathering wild fruit, — do not require more than a few hours. 
The time needed to complete those great industrial and 
engineering enterprises that are the glory of the present 
day, — such as mines, artesian wells, railways, tunnels, and 
canals, — is long and proportionate to the magnitude of the 
results. It wil l be many years before the Isthmian Canal 
will be completed, although it was begun in 1881. 

The element of time, an indispensable factor in all pro- 
ductive enterprises, is, as we shall presently see, one of the 
principal reasons for the importance of capital and the privi- 
leged position of those who happen to own it. It is plain 
that the men employed in building railroads or digging 
canals must subsist while engaged in such enterprises ; the 
requisite food and materials must be advanced by those who 
possess capital. 

It is not enough to note that time is an indispensable 
factor of all production ; we must add that man has only 
a limited amount of time at his disposal, not only because 
life is short, but also because many deductions must be made 
from a man's time ; of these deductions, three deserve special 
mention : — 

(1) Man cannot work every hour of the day. Time for 
sleep and for meals must be deducted, and experience has 
shown that nothing is gained by trying unduly to lengthen 
the working-day. Custom and law fix this period at about 
ten or twelve hours, and there is a strong tendency to reduce 
it to eight hours, i.e. one-third of a day. 

(2) Man cannot work all the days of the year. There is 
no country in which there are no holidays. England and 
America rigorously obey the rule to observe the Sabbath. 
Countries which, like France, pride themselves on being 
above the sabbatical superstition, make Monday a holiday. 



LABOR 85 

Moreover, days of illness must be taken into account. So, 
after all, it is rare for even the most industrious workman to 
reach an average of 300 work-days a year. 1 

(3) Man cannot work all the years of his life. He must 
deduct the years of infancy, and also the }^ears of old age (if 
he is fortunate enough to attain them). From the viewpoint 
of productivity those countries are most favored which count 
the largest number of persons between the ages of eighteen 
and sixty years, i.e. persons who are actively productive. 
Unfortunately, the majority die before attaining the end of 
this productive period, and a large number do not even enter 
upon it. 2 

1 The average in France, according to official statistics, is 295. 

2 According to the census of 1900, the number of persons in the United 
States between the ages of 15 and 60 was 597 per 1000 of the population ; in 
France the number is 610 per thousand, and in Germany, 565. 

The average age of decedents, according to the census of 1900, was 35.2 
years. In France, of every thousand persons born, 644 reach the age of 18 
years, and 360 pass the age of 60 years. 

The average duration of human life in civilized nations is about 33 years. 
It is probably within the truth to declare that one-quarter of the number of 
persons born die before the age of 6, one-half before the age of 16, and only 
one person of each 100 born reaches the age of 65. 

The average duration of human life is a matter of great economic impor- 
tance, inasmuch as a very slight increase in the average means a great gain 
of productive power. The productive years of life of a population must sup- 
port not only themselves, but also the unproductive years. (Consult R. 
Mayo-Smith, Statistics and Sociology, Vol. I.) 

Many European nations are severely handicapped in their productive 
powers by the existence of large standing armies, consisting of men in the 
prime of life who not only are not productive, but who absorb a large part 
of the products of those that are engaged productively. The total peace 
establishment of Germany, France, Italy, Austria, Russia, Great Britain, and 
Turkey in 1902 was 3,283,905 men. 



CHAPTER II — NATURE 

The term " nature " does not signify a definite, specific 
factor of production, but the sum total of those elements and 
productive forces that are furnished by our natural en- 
vironment. 1 Before we can produce anything we must have 
a favorable environment, land, and raw material that can be 
utilized. Nature also provides the forces that are used to 
propel machinery. 

I. Environment 

Some historians and philosophers may have exaggerated 
the influence of geographical environment on the political, 
literary, and artistic development of peoples ; but it would 
be difficult to exaggerate this influence so far as it concerns 
economic development and productive power. 2 

(1) Climatic conditions. Tropical lands may have wit- 
nessed the growth of brilliant civilizations, but they have 
never given rise to great industrial nations. Nature in the 
tropics seems to discourage productive activity, both by her 
generosity and by her outbursts of violence. In those blissful 
climes where food is the gift of nature, and there is no. need 

1 The term "land " was formerly used instead of " nature." These two 
expressions are, in fact, equivalent, if land is supposed to include not only 
the soil fit for cultivation, but the whole terrestrial globe and the atmosphere 
which surrounds it. To be sure, the only portion of the universe that can 
serve as the field for our economic activity is our planet, — and only the 
superficial crust of that. As savage tribes, however, have been known to 
make use of the crude iron found in meteoric stones, and as every motive 
force (winds, water currents, and the caloric energy stored up in coal) is, 
according to science, due to solar heat, the term "nature 1 ' is more accurate 
than the term "land." 

2 It is well known that Montesquieu attributed a decisive influence to 
climate. One branch of the school of Le Play, headed by M. Demolins, 

86 



NATUIIE 87 

for clothing or even housing, man learns to rely on nature 
and to avoid all effort. In those regions, moreover, physical 
forces are so exceedingly violent, their various manifesta- 
tions (torrential rains, floods, earthquakes, cyclones) are so 
irresistible, that man is cowed and does not even conceive the 
bold idea of mastering and utilizing them. He scarcely pro- 
vides for self-defence. In our temperate lands, on the other 
hand, nature is so niggard as to compel man to rely in a great 
measure on his own efforts. But the forces she displays are 
so gentle as to allow human industry to tame and utilize 
them. In these climates she may be said to foster productive 
activity both by what she refuses and by what she gives. 

(2) Geographical configuration. Who can estimate the in- 
fluence that England's insular position has exerted on her 
political, industrial, and commercial development ? The con- 
tinent of Africa, known to man from the remotest antiquity, 
and the seat of the oldest known civilization (that of Egypt), 
has to this very day remained beyond the pale of all economic 
progress, principally for want of a good system of navigable 
rivers. The same cause accounts fundamentally for the fact 
that North and South America, discovered hardly four centu- 
ries ago, are covered with an elaborate network of commercial 
routes running in all directions. The rivers of the New 
World flow into the ocean by large estuaries, and are so in- 
tricately joined that we can pass from the tributaries of the 
Plata into those of the Amazon and thence into the Orinoco, 

considers environment the starting-point of all social science. It distin- 
guishes three kinds of soil, which give rise to three distinct types of primitive 
societies : the steppe to the pastoral races, the seashore to fisher tribes, and 
the forest to the hunter peoples. These are the fundamental types of simple 
societies, i.e. those which subsist solely on the spontaneous products of 
the soil. 

But this school goes farther, and by means of the same theory explains 
the origin of all complex or civilized societies. Thus the primitive state of 
the soil is made the origin, as well as the sole cause of all present varieties 
of property, family, government, etc. This theory has been expounded in 
a very interesting manner by M. Demolins in his recent book, "Comment 
la route cre"e le type social. ' ' 



88 PRINCIPLES OF POLITICAL ECONOMY 

or from the basin of the Mississippi to the Great Lakes, almost 
without leaving the waterway. But the rivers of Africa, 
though they are quite as large as those of America, do not 
invite commerce ; a barrier of impassable cataracts or pesti- 
lential swamps makes the invasion of modern enterprise next 
to impossible. 

(3) The geological nature of the soil and subsoil is quite as 
important ; it creates agricultural and mineral wealth. The 
dread with which England calculates the time when her coal 
mines are liable to fail her, shows well enough how much 
she owes them for her industrial development. 1 

A nation is supported not only by its soil but also by its 
sub-soil, i.e. by its supply of coal, metals, petroleum, and all 
the other mineral resources that it possesses. Countries that 
possess both a fertile soil for agriculture, and a sub-soil that is 
rich in industrial raw materials, enjoy a great natural advan- 
tage over those that are not thus provided ; they can support 
a larger population, or, at all events, a relatively wealthier 
one. In 1900, there were in the United States 581,221 per- 
sons engaged in mining and quarrying, and the total value 
of our mineral production exceeded $1,000,000,000. 2 

At first sight it would appear that man is powerless to 
modify the environment with which nature has surrounded 

1 In 1866 Jevons declared that the English coal mines would be exhausted 
in a century, and Mr. Price Williams in 1889 made the same prophecy after 
a careful study of statistics regarding coal mining in that country. 

There seems to be no doubt that China possesses an enormous supply of 
coal. The coal fields of China, Japan, Great Britain, Germany, Russia, and 
India contain apparently about 303,000,000,000 tons, which is enough for 450 
years at the present rate of consumption. If we add the North and South 
American coal fields, the supply is about doubled. It should be borne in 
mind, moreover, that improved machinery has greatly increased the yield 
per miner. 

2 For the year 1901 the exact amount was $1,086,529,521. The most im- 
portant items in this total were : Coal, $348,910,469 (at the mines); pig iron, 
$242,174,000 ; clay products, $110,211,587 ; copper, $87,300,515 ; gold, 
$78,666,700 ; petroleum, $66,417,335 ; building stone, $55,615,926 ; iron 
ores, $49,256,245 ; silver, $33,128,400 ; lead, $23,280,200. 



LAND 89 

him, and that his only resource is to adapt himself to it as 
best he can. Yet he does succeed in exerting some modi- 
fying influence on this environment, although his influence 
necessarily is limited. He cannot create mines where there 
are none, but by judicious agricultural improvements he can 
make soil cultivable, and change marshes, stagnant ponds, 
and even gulfs, into arable tracts. He cannot alter the geo- 
graphical lines drawn by nature, but with a little complaisance 
on her part he can modify them ; for instance, by completing 
a network of inland water communication. He can overcome 
such barriers as mountains and arms of the sea, by construct- 
ing roads above, or, better still, beneath them. He can sepa- 
rate Africa from the old continent, and South America from 
the new, and thus change these two peninsulas into islands. 
Climatic conditions he certainly cannot alter ; but, by plant- 
ing extensive forests, and by means of systems of cultivation 
not yet entirely understood, perhaps human industry will yet 
be able greatly to modify the rule of storms and winds. 1 

II. Land 

A certain amount of the earth's surface is necessary for 
man to stand on. More is necessary for him to sleep on, 
still more for building a house, and much more for raising 
wheat and pasturing flocks. When the population of a 
country increases beyond a certain density, the question of 
surface becomes a serious one. When human beings in 
obedience to their social instincts swarm in one of those 
huge centres like London, Paris, or New York, the space for 
housing becomes insufficient ; plots of land acquire higher 
value than the buildings erected on them, even though they 
be palaces of costly marble. 2 As we shall see when dealing 

1 In fact, some scientists have proposed to alter the course of the great 
maritime currents, such as the Gulf Stream, for the purpose of distributing 
heat and cold to the continents, just as water and gas are distributed in cities. 

2 As much as $450 per square foot has been offered for land in New York 
City at the corner of Wall Street and Broadway. Cf. the interesting article 
on this subject in the Yale Review for 1902, by Richard M. Hurd. 



90 PRINCIPLES OF POLITICAL ECONOMY 

with house-rent, the social consequences which result from 
this state of affairs are most deplorable for the working 
classes. 

It would of course be absurd to fear that some day there 
will not be room enough on the earth for men to live on; 
yet it is not unreasonable to ask whether there will always 
be enough space to supply food. Considerable ground is 
required to supply food for one man, although the minimum 
requisite amount is always being diminished by the prog- 
ress of civilization and agricultural methods. People that 
live by hunting must have several square leagues per 
man ; pastoral races need several square miles ; agricul- 
tural nations require only a few acres. The limit falls 
as we pass from extensive to intensive methods of farming. 1 
In China, where farms are as small as our garden plots, the 
prevailing method of cultivation enables several persons to 
subsist on the produce of an acre. Yet the minimum of 
necessary space, though constantly reduced, still exists and 
is sufficient to cause some anxiety regarding the destiny of 
the human race. 

The discovery of the New World, Australia, and South 
Africa has assured us sufficient territory for many genera- 
tions. Yet with an annual increase of the human species 
scarcely less than fifteen millions, these reserves for the 
future will some day certainly be exhausted. There is now 

1 In Greenland among the Esquimaux, and among the native inhabitants 
of the Amazon forests who live by hunting, the density of the population is 
about one per thousand square miles. Among the Kirghises and Turcomans 
of Central Asia (who are shepherd peoples) the density is less than one per 
square mile. In Russia, an agricultural nation, it is 15 per square mile ; in 
industrial nations like England and Belgium it is 557 and 533, respectively, 
per square mile. 

In 1900 the density of the population of the United States was 25.6 per 
square mile ; in 1890 and 1880, respectively, it was 21.2 and 17.3 ; but at the 
time of the first census, in 1790, it was only 4.9. The density varies greatly 
from one state of the union to another, and is greater in the cities than in 
country districts. In Rhode Island it is 407.0 and in Nevada only 0.4 per 
square mile. 



RAW MATERIALS 91 

no hope of discovering new worlds. Before half a century 
has elapsed, the last vacant spot doubtless will be taken into 
possession, and the last boundary line will be drawn. Then 
the human race will have to content itself with fifty-two 
million square miles of land area, without the hope of ever 
increasing it by new conquests or discoveries ; and our only 
consolation will be to repeat the line that Regnard, with a 
pride scarcely justified, wrote on a rock in Lapland : — 

" Hie stetimus tandem nobis ubi defuit orbis." 

III. Raw Materials 

The inorganic substances that compose the earth's crust, 
and the organic substances due to plant and animal life on 
its surface, supply industry with the raw materials that are 
indispensable to all wealth and that form its basal element. 
Some of the necessary raw materials nature has spread about 
with lavish profusion, Avhile others she has given but spar- 
ingly. Even those that exist in large quantities may be 
scarce in certain regions. Drinking water is generally men- 
tioned as an example of superabundant wealth ; yet nearly 
all great cities find the supply of water insufficient, and 
resort to expensive engineering works to procure it. Only 
one substance is everywhere provided in unlimited quantities, 
viz., air. But when we are in quest of special qualities of 
healthfulness, coolness, or warmth in the air, then it cannot 
be said to be equally at every one's disposal. If at Newport, 
Bar Harbor, and any other celebrated seaside resorts a foot 
of land commands a high price, it is not because people are 
willing to pay a high price for the land itself, but because of 
the unequalled air and sunshine to be found at these places. 

Those materials that are superabundant but unequally 
distributed, human ingenuity can transport to places where 
they are lacking. It is for this reason that transportation 
must be regarded as an act of production. But since matter, 
o\\ ing to its weight and inertia, sometimes offers considerable 



92 PRINCIPLES OF POLITICAL ECONOMY 

resistance to any attempt at removal, and since the labor and 
expense necessary for overcoming this resistance increase in 
proportion to the distance to be covered, the industry of 
transportation cannot entirely do away with the inequality 
of natural conditions. 

As for those natural substances that exist in limited 
quantities, it is possible that man, by discovering the pro- 
cesses of nature which brought them forth, may actually re- 
produce them. We may some day be able to make diamonds 
by crystallizing carbon ; or if the supply of coal should ever 
become exhausted, we may succeed in extracting fuel from 
the carbonates of lime found in large quantities in the earth's 
crust. It is also possible that we may find substitutes for 
those materials that are not obtainable in sufficient quanti- 
ties. We sometimes succeed in doing this, and should al- 
ways succeed if our knowledge were wide enough ; for 
there is such an infinite variety of organic and inorganic 
substances — many of which possess similar characteristics 
— that they could to a certain degree take each other's place. 

IV. The Law of Diminishing Returns 

As land and raw materials are limited in quantity, the 
production in which they are the necessary factors also must 
be limited. And such is indeed the fact. Hunting, which 
played so great a part in primitive societies, has disappeared 
from the list of productive industries in civilized countries, 
for the very good reason that, despite the regulations estab- 
lished for its protection, it has ceased to give a satisfactory 
remuneration. Even in the deserts of Africa, and in the 
uninhabited territories near the poles, the hunt for elephants, 
ostriches, beavers, otters, and whales is becoming unprofit- 
able. The scarcity of fish in the seas which border our 
shores is a subject of lamentation for our sea fishermen, who 
are now obliged to pursue fish out on the high seas and to 
equip themselves with larger vessels. The disappearance of 



LAW OF DIMINISHING RETURNS 93 

forests, and consequently of wood for carpentry, is an ac- 
complished fact in several European countries, particularly 
England. 

To be sure, there are industries in which a change of 
processes may avert, for a time, the threatening calamity. 
Instead of hunting ostriches, we may raise them ; instead of 
catching fish in the seas or rivers, we may hatch them ; in- 
stead of merely cutting down trees, we may at the same time 
plant them. This would amount to changing these occupa- 
tions from simply extractive industries into productive ones, 
like agriculture, in which we do not merely let nature work, 
but assist and guide her. There are, however, two important 
limitations even in agriculture : — 

(1) Agricultural production is limited by the supply of 
mineral substances that are indispensable to plant-life. Every 
plot of land, even the most fertile, contains only a fixed 
amount of nitrogen, potassium, phosphoric acid, etc. A part 
of these essential substances is removed with every crop that 
is raised on the land. It is true that the farmer aims not 
only to restore to the soil a part of the substances that each 
harvest has removed, but also to enrich it by adding new 
substances. But it must be borne in mind that the sources 
from which the farmer derives these enriching substances are 
themselves limited. Natural fertilizers restore to the soil 
only a part of what the animals that pasture on it have con- 
sumed, and chemical fertilizers consist of minerals (phos- 
phates, nitrates, guano, etc.), the supply of which is small 
and easily exhaustible. 

(2) Moreover, agricultural production is limited by the 
time and space necessary for vegetable and animal life ; these 
conditions are much more rigid, and less subject to modifi- 
cation, than those of industrial production. The farmer is 
reduced to an almost passive part in production ; he must 
wait patiently for nature to accomplish her part of the work 
according to laws which he knows but imperfectly and which 
he cannot change. It takes months to transform the seed 



94 PRINCIPLES OF POLITICAL ECONOMY 

into ears of wheat ; and it takes years for the acorn to 
become an oak. Again, every plant requires room in which 
to spread its roots and to breathe ; this space cannot be 
restricted. It is different with the industrial worker. The 
mechanic in his shop generally subjects matter to simple 
transformations whose physical and chemical laws are much 
less mysterious than those of organic life. The proof of 
this lies in the fact that these laws have been tamed, as it 
were, and obliged to work with mechanical precision at man's 
command. The industrial worker is not tied down to an 
inexorable succession of seasons ; he can ignore climate and 
weather, and keep his machinery and furnaces going day 
and night, summer and winter. 1 

Doubtless, there is not a single piece of land of which the 
farmer could not, if need be, increase the yield. Only, after 
a certain stage of cultivation, he cannot do this except at 
an increased cost in labor. There must consequently be a 
point at which the effort made to increase the crop is incom- 
mensurate with the result. 

Suppose an acre of land produces 40 bushels of wheat, and 
that these 40 bushels represent 20 days' labor, or, if we 
prefer to express the same thing in money, an expense of $20. 

1 We may, nevertheless, ask the question : Since the limitations encoun- 
tered by farming are due to the fact that it is concerned with living organisms, 
why should we not try to surmount this obstacle by courageously giving up 
the assistance rendered us by the mysterious forces of animal and plant life, 
and seek to manufacture food just as a scientist manufactures chemical sub- 
stances ? All the tissues of living beings, animals or plants, are made up 
almost exclusively of oxygen, hydrogen, nitrogen, carbon, and mineral salts. 
All these materials exist in superabundant quantities in the earth's crust and 
in the atmosphere. The problem, therefore, seems to be theoretically solva- 
ble ; in fact, some chemists believe that we are on the verge of its practical 
solution. If chemists should ever succeed in solving it, they will have dis- 
covered more than the solution of a chemical problem, or even the problem 
of Life ; they will have found the solution of the social problem, or, at least, 
they will have revolutionized all the laws of economics. For if food could 
be manufactured, agriculture would be useless, and man would use the earth 
merely to walk and build on. Every small piece of land could then feed a 
population as dense as that of the most populous quarters of our large cities. 



LAW OF DIMINISHING RETURNS 95 

To make an acre produce twice as much wheat (i.e. 80 
bushels), more than 40 days of labor or more than $40 of 
expenditure would be necessary. To double the product it 
would be necessary to triple, perhaps to quadruple, the labor 
and expense. This fact is expressed by the law of dimin- 
ishing returns, according to which the returns are not 
directly proportionate to the increased expenditure of labor 
or capital. 1 

This law is certainly borne out by the experience of every 
day. Ask an intelligent farmer whether his land could not 
produce more than it does. He will reply : " Certainly, 
the wheat crop would be larger if I chose to use more 
manure, to apply more thorough labor, to clear the land of the 
smallest weeds, to have the earth carefully dug up by manual 
labor, to use the hoe more thoroughly, and to protect the har- 
vest from insects, birds, and parasitical weeds." Then ask 
him why he does not do all this, and he will reply that it 
would not pay ; the increase of crops would cost more than 
it would be worth. There is therefore in the output of any 
piece of land a point of equilibrium which marks the limit, 
not beyond which it is impossible to pass, but beyond which 
no one cares to pass because there is no advantagem. doing so. 2 

If things were not as they are in this respect, if we could 
increase the crop of a given piece of land indefinitely, upon 
the sole condition of proportionately increasing labor and 
expenditure, the tillers of the soil would not hesitate to do 
this : instead of increasing the size of their farms, they 

1 It is, of course, true that improved methods of cultivation may for a time 
put off the point of diminishing returns. 

2 It may appear strange to speak of the limitations of agricultural produc- 
tion at a time when the superabundance of farming products is such that Euro- 
pean farmers are complaining, and governments in Europe feel called upon 
to protect them by customs duties excluding foreign cereals, cattle, etc. But 
this may be said to be an accident, due to the recent cultivation of large areas 
in new countries with sparse populations, on which extensive cultivation is 
easily practised because land is cheap and abundant. This fact explains the 
postponement of one effect of the law of diminishing returns, and its tempo- 
rary suspension, but it does not abrogate the law. 



96 PRINCIPLES OF POLITICAL ECONOMY 

would reduce them to the smallest possible area, because the 
smaller the area the easier it is to manage a farm. But 
in this event the earth's surface would be entirely different 
from what it is. The simple fact that things are not as we 
have just supposed, and that poorer and less favorably situ- 
ated land is in fact constantly brought under cultivation, 
demonstrates that in reality we cannot expect a piece of land 
under given conditions to yield more than a limited crop. 
(See the section on Rent.) 

V. Motive Forces 

We have explained that production consists in changing 
the place or the form of matter. The resistance offered by 
matter to these changes may sometimes be considerable, and 
man's muscular energy is not very great. In all times, 
therefore, and especially since the abolition of slavery has 
made it impossible to employ the strength of his fellows, 
man has endeavored to supplement his strength by using 
the motive forces provided by nature. There are not very 
many of them, and they have often been overestimated. 
There are really only four or five which man has been able 
to utilize in production : the muscular energy of animals, the 
propelling power of wind and of water, the expansive power 
of vapors (especially of steam), and recently, although thus 
far in a small measure, electricity \ Man makes use of these 
natural forces by means of machinery. Machines are only 
tools, with the difference that most tools are manipulated by 
hand, whereas machines are worked by natural forces, such 
as waterfalls and steam. 1 Now it is a difficult problem to 

1 When the instruments worked by man are complicated, they are some- 
times also called machines, e.g. sewing-machines ; but this terminology is 
not correct. Besides, tools and implements can also multiply the power of 
man. Aided by a hydraulic press, a child can exert a pressure that is theo- 
retically unlimited. With a lever and a place on which to rest it, Archimedes 
could have moved the world. Yet it has been calculated that had Archimedes 
found this necessary point of support, and worked several millions of years, 
he could have raised the world only a few inches ; for a law of mechanics 



MOTIVE FORCES 97 

utilize natural forces and make them turn wheels, propel 
planes, or work shuttles. 

Much has been written of the importance of farm machin- 
ery in the economics of agriculture, but the fact is too often 
overlooked that the machinery is valueless unless driven by 
some other power than human muscle. The power of steam 
and of falling water applied through the agency of the steam- 
engine and the water-wheel gives great effectiveness to labor 
in factories. The corresponding power of the farm at the 
present time is principally that of horses and mules, although 
in California, Hawaii, and Louisiana the steam-engine is 
used to a limited extent in ploughing and in transporting 
cane from the fields to the sugar-houses. 1 

In our manufactures the four important motive forces are 
steam, water, electricity, and gas. Steam; which in 1870 
furnished 51.8 per cent of the motive power for manufac- 
tures, now supplies 77.4 per cent. Water-wheels, which in 
1870 provided 48.2 per cent, now furnish only 15.3 per cent. 
Electric motors in 1890 represented only three-tenths per 

teaches that every gain of power is counterbalanced by a loss of speed. 
With the aid of mechanical devices a man may be enabled to lift a thousand 
times as much as he can lift with his arms, unaided ; but it takes a thousand 
times as long to do it. Now, as time is valuable, the advantage resulting 
from the use of implements is practically restricted. When, however, ma- 
chines are operated by means of natural forces, there is no limit to the increase 
of power. 

There are vessels that have machinery capable of producing 80,000 horse- 
power, which is equivalent to the strength of 300,000 rowers, or even 900,000, 
as it would be necessary to have three relays every twenty-four hours. These 
rowers could propel such a vessel three or four miles an hour, whereas 
modern methods secure a speed of 25 to 30 miles. Assuming that such a 
vessel as this employs 200 men, the power of each may then be said to be 
multiplied by 4500 through the use of modern propulsive machinery. 

The Sunday editions of some of our newspapers contain more printed 
matter than this whole volume. If the amount were the same, the circula- 
tion only 100,000, and all the work had to be done in writing in the same 
time now occupied by printing {i.e. about four hours), three million persons 
would be required to publish such a paper. 

1 In 1900 there were in the United States 5,739,657 farms, having a total 
of 21,646,731 horses, mules, and asses. 



98 PRINCIPLES OF POLITICAL ECONOMY 

cent, and now they produce 2.7 per cent of the power used 
in manufactures. In 1890 the gas-engines used in manufac- 
turing produced only one-tenth of one per cent of the total 
power utilized, whereas in 1900 they furnished 1.3 per cent. 1 

A few decades ago the use of power in any considerable 
quantity was limited practically to manufacturing opera- 
tions ; but within the last ten or twelve years the use of 
electricity for lighting and for the operation of street rail- 
ways has developed enormously. During 1900 there were 
over twelve hundred electric railway lines in operation in 
the United States, and over thirty-three hundred central 
stations for the distribution of electric current for lighting 
and power purposes. The modern office building, often 
housing a population equal to that of a small town, is almost 
wholly a creation of the past ten years, and the power 
required in these great structures, not only for lighting 
purposes, but for the operation of elevators, pumping water, 
compressing air, and operating refrigerating and ventilating 
machinery, forms a large item when the number of these 
buildings in the United States is taken into consideration. 2 

The use of electricity, moreover, as an agency for the 
transformation and transmission of the energy developed by 
falling water, has entirely changed the conditions under 
which such primary power can be utilized to advantage. 
The practical possibility of transmitting power thus devel- 
oped over long distances has removed the necessity of build- 
ing mills adjacent to water powers. Again, the use of steam 
power, either directly applied or electrically transmitted, is 
becoming more and more general in mining and quarrying, 
in public works of every description, in the sinking of 

1 According to the Twelfth Census of the United States, the aggregate 
motive power employed in our manufacturing establishments in 1900 was 
11,300,081 horse-power, as compared with 5,954,655 horse-power in 1890, 
3,410,837 horse-power in 1880, and 2,346,142 in 1870. 

2 Very interesting data regarding the new uses of power, and especially of 
electricity, are given in Vol. VII of the Twelfth Census, from which nearly 
all of the above facts are taken. 



MOTIVE FORCES 99 

foundations, in the erection of buildings, and in nearly every 
branch of industry. Thus the amount of power used apart 
from manufacturing operations is increasing rapidly. 

It should be noted that the more powerful these natural 
forces are, the more time and trouble it has taken man to 
utilize them and make them subservient to his purposes. 
Their resistance increases with their power. The " harness- 
ing " of Niagara Falls, for example, was so stupendous an 
undertaking that our forefathers, scarcely conceiving its pos- 
sibility, left it for modern engineering to accomplish. 

The domestication of various animals — such as the horse, 
camel, ox, elephant, reindeer, and Esquimau dog — supplied 
man with the first natural force for carriage, draught, and 
tillage. This was an important conquest, for animals are 
relatively stronger than men. A horse's strength is esti- 
mated at six or seven times that of man, and the food a horse 
requires is by no means of greater cost. But the number of 
horses in a country is limited, especially in countries with an 
increasing population, for they require considerable space 
whence to obtain food ; therefore the motive force they af- 
ford is, in populous countries, of comparatively little account. 

The motive force of wind and water has always been used 
for transportation, but its industrial application has until re- 
cently been confined to turning windmills and water-wheels. 

The expansive power of gases, or rather the heat gen- 
erated by combustion, (of which this force is only a transfor- 
mation,) is artificial in the sense that it is not created by 
nature, but by man. For this reason it possesses inestimable 
advantages. Man can generate it where he pleases, when he 
pleases, and in the manner and quantity that suit him. It 
is mobile, portable, continuous, great or small, according to 
demand. The power of steam can be raised to many times 
the atmospheric pressure ; theoretically, at least, there is no 
assignable limit to the possibilities of its increase. 1 

1 Water heated to 516 degrees Centigrade — not an exceedingly high tem- 
perature — should develop a pressure of 1,700,000 atmospheres, which is more 

LofC. 



100 PRINCIPLES OF POLITICAL ECONOMY 

y 

The prehistoric inventor whose name will remain forever 
unknown, but whom the gratitude of mankind has deified as 
Prometheus, who first caused a spark to spring from the fric- 
tion of two pebbles, never suspected when he looked on this 
flame, which was probably due far more to chance than to his 
genius, what a marvellous power he was granting to human 
industry. Fire ministered first of all, no doubt, only to the 
humble wants of domestic life. Later it was used for the 
extraction, the founding, and working of metals. Its utiliza- 
tion as a motive force dates from the time that men dis- 
covered the explosive power a spark could communicate to 
some substances, e.g. gunpowder ; and in this form it is still 
employed not only to hurl projectiles for a mile or two, but 
also to bore tunnels and break rocks. But it was not until 
Newcomen, in 1705, and James Watt, in 1769, used it for 
producing steam in a closed reservoir, and thus created the 
wonderful instrument of modern industry which we call the 
steam-engine, that fire, or rather heat, became the guiding 
spirit of industry. 1 

We are therefore justified in asking, with some degree 
of anxiety, what will become of human industry when the 
supply of coal runs short and our fires must be extinguished ? 
Probably we shall then return to the forces of nature and 
learn to make better use of them. Already we have begun 
to do this. Much has been said recently of the " white coal," 
which consists of glaciers ; the water that runs from them in 
torrents has been made to propel water-wheels and is thus 

than sufficient to lift the Himalaya Mountains. The only difficulty would be 
to find some means of containing this pressure. 

1 1 call the steam-engine a wonderful instrument because of the services 
it has rendered. But in reality it is a very defective device. It utilizes only 
a small part, at most a tenth, of the heat generated by the combustion of coal. 
Much of it is lost from the furnace to the boiler, and some between the boiler 
and the engine proper. Hence the remark made by a well-known French 
engineer, Le Bon, "I hope that before twenty years have passed, the last 
specimen of this rude machine will have taken its proper place in museums, 
side by side with the stone hatchets of our primitive ancestors. " 



MOTIVE FORCES » 101 

used to manufacture paper. In the mountainous regions of 
Savoy, Switzerland, and Italy, hydraulic energy produces sev- 
eral thousand horse-power, which is employed in producing 
electricity and in manufacturing aluminum and carburetted 
calcium. Elsewhere the same power is employed to furnish 
illumination for towns or motive force for street railways. 

Progress in this direction probably has been as rapid in the 
United States as anywhere else. Here electrical transmission 
has rendered possible the advantageous utilization of water 
power in several distinctly new forms, such as : the large 
central stations for distributing power to numerous plants ; 
the use of remote mountain Avater powers for the operation 
of single plants, often many miles distant, of which so many 
notable examples are to be found in the far West ; and the 
more advantageous use of larger streams on the Atlantic 
coast, usually in closer proximity to the mills, but under 
conditions which would present many difficulties without the 
useful agency of the electrical current. 

The development of electric power transmission at Niagara 
Falls has been the largest and most conspicuous of its kind, 
although as to the length of transmission and the voltage 
at which the current is sent over long distances it is by no 
means the best example that can be found. There are two 
separate and distinct enterprises on the American side of the 
Falls, one of which has an ultimate capacity of one hundred 
thousand horse-power. The potential power of the main 
stream is estimated to be equal to at least six or seven 
million horse-power. 1 

1 A large amount of Niagara current is employed in electro-chemical and 
electro-metallurgical operations. In the immediate vicinity of the Falls the 
current is now used for electric lighting, and about one thousand horse-power 
is also delivered to the street railway trolley system. Factories on the spot, 
working up raw material into food, textile fabrics, etc. , utilize several hundred 
horse-power, and the current is also used for the manufacture of "merry-go- 
rounds," as well as for operating ventilating blowers in the public schools. 

The current is carried from Niagara to Buffalo for use by the street railway 
system, so that at all hours of the day and night Niagara is transporting the 
public of a great city more than twenty miles distant. Current from the same 



102 • PRINCIPLES OF POLITICAL ECONOMY 

It is certain that in glaciers and in all running waters there 
are almost unlimited quantities of stored-up energy. It has 
been estimated that the motive force of the streams of France 
alone amounts to thirty million horse-power — an amount of 
physical energy almost equivalent to that of all men of work- 
ing ages in the entire universe. The waves which the wind 
causes on the surface of the seas, or the rising tide which twice 
every day presses against thousands of miles of coast-line, 
really constitute inexhaustible stores of motive power. Un- 
fortunately, these forces of nature, which might lift the world, 
still seem too savage and too untamable to be controlled. But 
if they could be transformed into electricity, the energy they 
provide might be made transportable and divisible. The cur- 
rent of the Rhone River, which has uselessly expended itself 
in wearing away pebbles, is now employed to work the looms 
of the Lyons silk factories. Motive force is at present dis- 
tributed to the small establishments that require it, just like 
water and gas ; the mere turning of a spigot or pressing a 
button is sufficient to obtain it. Very lately it has been sug- 
gested to draw from the source of all energy — the sun itself 
— all the heat we require. But even admitting that this could 
be done, the force borrowed from the sun would — more than 
any other natural force — have the disadvantage that we 
should probably be unable to develop it wherever, whenever, 
and to the extent that we want it. The sun does not shine 
everywhere nor always. If ever England should depend on 
it to work her factories, what a terrible calamity this would 

source is used in several miscellaneous industries at prices which compete so 
favorably with those of steam, oil, natural and artificial gas, that the demand 
is rapidly increasing. 

Electric current is now transmitted from the Sierras, in eastern California, 
as far as San Francisco ; this constitutes the longest electric power transmis- 
sion in the world, the distance being about two hundred miles. The employ- 
ment of this current is not less varied than at Niagara, ranging from the 
operation of street cars in Oakland to the running of a flour mill at Stockton, 
and from use in mines in various parts of the state to use in miscellaneous 
industries at Sacramento, Benicia, San Jose, and elsewhere. 



ILLUSIONS CONCERNING MACHINERY 103 

involve for that nation ! The fogs of the North Sea would 
become her shroud. Men would then be obliged to build 
their industrial centres in the heart of the Sahara desert, 
where the sun shines most hotly and most steadily. 

VI. The Illusions to which Machinery has given Rise 

Ambitious hopes have been aroused by the marvellous 
effects of the use of machinery propelled by the forces of 
nature. It seems almost as though we may some day be 
liberated from the necessity of working to gain a living. 
Some persons have estimated that four hours of labor, or 
perhaps even two hours, or, according to a socialistic calcula- 
tion, one hour and twenty minutes per day, would suffice to 
produce more wealth than is necessary to satisfy all our 
wants. 

The manufactures of the United States were in 1900 car- 
ried on very extensively by means of steam, water, gas, and 
electric power ; according to the census of manufactures of 
that year over 11,300,000 horse-power was produced by ma- 
chinery thus propelled. As each horse-power is equivalent 
to the muscular energy of six men, it would have required 
67,800,000 men to furnish this amount of power. The man- 
ufacturing industries of the nation were, however, really 
carried on by less than 6,000,000 persons. In 1902, more- 
over, there were nearly 40,000 locomotives in the country. 
To have done the work of these locomotives upon the com- 
mon roads of the country there would have been required, in 
round numbers, 76,000,000 horses and 19,000,000 men. 1 But 
all the railroads of the country were operated by only one 
million persons. To have done the work, then, accomplished 
by power and power machinery in our mechanical industries 
and upon our railroads there would have been required nearly 
87,000,000 men. Now according to the ratio of the census 

1 This calculation is made on the same basis as that given by Carroll D. 
Wright, United States Commissioner of Labor, in his "Outline of Practical 
Sociology," Fifth edition, 1902, p. 120. 



104 PRINCIPLES OF POLITICAL ECONOMY 

of 1900, 87,000,000 men represent a population of over 
400,000,000 persons, which, if the use of power in manufac- 
tories and on the railroads were discontinued, would have to 
be added to our present population of 76,000,000. 

If in addition to the above-mentioned uses of power ma- 
chinery, we consider its extension to many fields of applica- 
tion in which its use was previously unknown, we shall be 
ready to admit that the power machinery used in the various 
industries of the nation has multiplied each workman's pro- 
ductive power at least ten times ; or, to employ a more pic- 
turesque metaphor, we may say that each of them has ten 
slaves at his service, giving him a position almost equivalent 
to that of a Roman patrician and permitting him to add the 
pleasures of wealth to those of idleness. As a consequence 
of this new slavery that takes the place of the old, why will 
not the men of the future be able to lead the noble life of 
the ancient Greeks in the Agora or of the Romans in the 
Forum; why will they not then be able to consecrate to politi- 
cal life, to artistic amusements, to gymnastic exercises, or to 
elevated mental speculations, the hours that were previously 
devoted to manual labor, — with the sole difference that what 
was formerly the privilege of the few will become the lot 
of all? 

This is indeed an alluring prospect, and the socialists 
exult in it. It is perhaps unfortunate that a closer analysis 
dissipates the illusion. Such a social state as this may, in- 
deed, not even be desirable. Antique slavery was no less 
harmful to the masters than to the slaves, since it led the 
former to lose all habit of effort and all taste for work. 
It is to be feared, therefore, that the slavery of natural 
forces would have similarly disastrous effects on the men of 
the twentieth century. They, too, might in the course of 
time have no ideal but that of the degenerate Romans: 
panem et circenses. 

Furthermore, an analysis of the above fantastic prophecies 
will show that these hopes are greatly exaggerated. The 



ILLUSIONS CONCERNING MACHINERY 105 

larger part of the mechanical energy used in modern indus- 
trial life is applied exclusively to transportation, by means 
of steamboats and locomotives. Machinery does, to be sure, 
multiply our productive energy ; but a large number of work- 
men are employed both in producing it and in attending to it 
while in use. 1 Steam has, of course, effected a revolution by 
almost removing the difficulties of transporting passengers, 
exchanging goods, communicating ideas, and by developing 
the solidarity of mankind, From this point of view it has 
performed an ethical service the importance of which can- 
not be exaggerated. But it would hardly be true to say 
that steam, when applied to transportation, has multiplied 
products. 2 

The goods an increase of which could cause a notable im- 
provement in the condition of mankind are agricultural prod- 
ucts ; the first requisite of welfare is food, and, if possible, 
good food in abundance. Yet this is precisely the province 
in which machinery has thus far made but little advance. 
Of the machines employed in farming, there are few that 
really increase production. Irrigating appliances doubtless do 

1 Professor Leroy-Beaulieu points out in his ' ' Treatise on Political Econ- 
omy " that economic progress is less great in reality than in appearance, inas- 
much as a gross increase of productive power is mistaken for a net increase. 
Not only is a great part of mechanical energy applied exclusively to transpor- 
tation, but many machines are used only to manufacture other machines or 
objects that are not directly consumable. Machines, moreover, require a 
large number of workmen for their production, their repair, and their man- 
agement. Few machines are utilized to the full extent of their productive 
capacity, and a large number remain idle a great part of the time. Again, 
all the labor and machinery that is used for purposes of advertising, making 
samples, etc., cannot be regarded as really productive. Besides, the rapid suc- 
cession of new inventions, discoveries, and improvements leads to the aban- 
donment of machinery that has been used but a short time. Finally, 
machines consume large amounts of coal, oil, and other materials whose pro- 
duction and transportation require the labor of many persons. 

2 Steam transportation multiplies products for the time being by bringing 
them from distant places ; but this is clearly only a temporary state of affairs 
due to the fact that these localities are still very sparsely populated and need 
not keep for their own consumption all that they produce. 



106 PRINCIPLES OF POLITICAL ECONOMY 

increase crops, but threshers and most of the other machines 
simply economize human labor but do not bring forth a 
single additional blade of wheat. In fact, many machines 
involve a partial waste of the crop that would have been 
saved by careful manual labor. Is this slow development 
of machinery 1 in the food -supplying pursuits due only to the 
routine spirit of the farming classes, as many think, or is it 
due rather to the nature of agriculture itself? The latter 
explanation seems to us the true one. The soil is the labo- 
ratory of Life, and Life has forces that are mysterious and 
recalcitrant. 

There is still another business that is of capital importance 
from the viewpoint of human prosperity ; namely, the con- 
struction of houses. To this branch of production machinery 
is scarcely applicable, save under exceptional circumstances. 2 

The use of natural forces to propel machinery has resulted 
in great cheapness and abundance only in one field of pro- 

iThe census of 1900 indicates that implements and machinery used on 
farms in the United States represent only 3.7 per cent of the value of all 
farm property. This is equivalent to an average of 90 cents per acre devoted 
to farming in 1900, whereas in 1890 the value was 79 cents per acre ; the 
census adds, however, that "apart of this increase is unquestionably more 
apparent than real." 

An account of the exceptionally extensive use of machinery in agriculture 
on the "bonanza farms" of the West is given by William Allen White in 
Scribner's Magazine for November, 1897, under the title, "The Business of 
a Wheat Farm." 

2 There are houses in sheet- iron that may be taken apart and transported. 
If this method of construction were to become general, it would cause a great 
revolution. Houses would again become mere furniture, as in the patriarchal 
period. But at present machinery is employed only in the larger cities in 
constructing buildings. The result is that comfortable homes (with which 
health, family life, and morality are so closely connected) do not increase 
as rapidly as our need for them ; the rent of buildings increases more quickly 
than the price of food. 

It must, however, be admitted that machinery is used quite extensively in 
the construction of high buildings in our large cities. Not only is the entire 
framework of these structures frequently made of steel, but power tools are 
used for such diverse purposes as drilling, blasting rocks to construct founda- 
tions, cutting stones, etc., — all of which are elements in the cost of buildings. 



MACHINERY AND THE LABORER 107 

ductive activity ; namely in manufacturing. In this branch 
it has gone even beyond our hopes, since it causes a super- 
abundance and obliges great industrial producers to combine 
for the purpose of restricting the output. 

Finally, we must blame machinery for the crises produced 
by a superabundance — an overproduction — of goods ; we 
must blame it for the barrack system of factories that marks 
modern industry, and, above all, for the constant failure of 
many workers to find employment. The last of these effects 
is the most remarkable result of the use of machines ; it 
has aroused the bitter opposition of the working classes to 
the introduction of labor-saving (and consequently labor- 
supplanting) machinery. 

It scarcely seems necessary to multiply examples of the 
economy in labor effected in some branches of production by 
the introduction of machinery, so often has this fact been 
emphasized and discussed. 1 There is, moreover, no cause for 

1 The following facts are taken from the First Animal Report of the 
United States Commissioner of Labor for 1886 : In the timber business 
12 laborers with a Bucker machine will dress 12,000 staves. The same 
number of men by hand labor would have dressed in the same time only 
2500. In the manufacture of paper a machine now used for drying and 
cutting, run by 4 men and 6 girls, will do the work formerly done by 100 
persons, and do it much better. In the manufacture of wall paper the best 
evidence puts the displacement in the proportion of 100 to 1. In a phosphate 
mine in South Carolina 10 men accomplish with machinery what 100 men 
handle without it in the same time. There has been a displacement of 50 
per cent in the manufacture of rubber boots and shoes. In South Carolina 
pottery the product is 10 times greater by machine processes than by 
muscular labor. In the manufacture of saws, experienced men consider 
that there has been a displacement of 3 men out of 5. In the weaving of silk 
the displacement has been 95 per cent, and in the winding of silk 90 per cent. 
A large soap-manufacturing concern carefully estimates the displacement of 
labor in its works at 50 per cent. In making wine in California a crushing 
machine has been introduced with which 1 man can crush and stem 80 tons 
of grapes in a day, representing an amount of work formerly requiring 8 men. 
In woollen goods modern machinery has reduced muscular labor 33 per cent 
in the carding department, 50 per cent in the spinning, and 25 per cent in the 
weaving. In some kinds of spinning 100 to 1 represents the displacement. 

Further data of the same nature may be found in Carroll D. Wright, 



108 PRINCIPLES OF POLITICAL ECONOMY 

surprise in the frequent occurrence of labor agitation against 
the introduction of machinery ; the industrial history of the 
last few centuries is full of examples not only of popular 
animadversion but of actual violence toward those who are 
held responsible for its invention. In the sixteenth century 
the city of Dantzig prohibited the introduction of ribbon 
looms, and the inventor of them was drowned by the en- 
raged populace. Jacquart, the inventor of a weaving loom, 
three times came near being killed by the people of Lyons. 
Hargreaves was persecuted by the workers in England. In 
1811 a party of English laborers called Luddites destroyed 
newly invented machinery in the northern and midland 
counties, and were only suppressed by military force. A 
former president of Mexico, Santa Anna, opposed the plan 
to build a railroad because it would deprive the muleteers of 
their employment. 1 

The direct advantages of machinery which political econo- 
mists have generally pointed out are principally the follow- 
ing : — 

(1) Machinery diminishes the strain on human muscles 
and relieves men of the grievous fatigue which not very long 
ago made them prematurely old. It does away with the dis- 
gust of many kinds of labor that were formerly exceedingly 
distasteful. 

(2) Machines permit the employment of workers of aver- 
age strength and ability for tasks that formerly required an 
exceptional degree of one or both. 

(3) Machines perform work much more rapidly than 
would otherwise be possible. 

"Industrial Evolution of the United States," Chapter 27; J. A. Hobson, 
"Evolution of Modern Capitalism" ; the article on Machinery in Bliss, 
" Encyclopedia of Social Keform " ; and the Thirteenth Annual Report of 
the United States Commissioner of Labor, which is devoted entirely to the 
subject of Hand and Machine Labor. 

1 Many incidents of the same nature may be found in Roscher's 
" Nationaloekonomik des Handels und Gewerbefleisses. " The Luddite riots 
are referred to by Green, " History of the English People," Vol. IV, p. 377. 



MACHINERY AND THE LABORER 109 

(4) Machinery excels, both in the performance of exceed- 
ingly great tasks and in the accomplishment of exceptionally 
delicate ones. There are trip-hammers weighing several 
tons that strike three hundred blows a minute, as well as 
delicate devices that could crack an eggshell without crush- 
ing it. There are engines of ten thousand horse-power, on 
the one hand, and, on the other hand, dividing machines that 
can cut an inch into ten thousand equal parts. 

(5) Machinery performs the monotonous work and lessens 
the monotony of life. "Nothing could be more narrow or 
monotonous than the occupation of a weaver of plain stuffs 
in the old time. But now one woman will manage four or 
more looms, each of which does many times as much work in 
the course of the day as the old hand loom did ; and her 
work is much less monotonous and calls for more judgment 
than his did." — Marshall, "Economics of Industry." 

(6) Machinery permits the production of a large number 
of exactly identical pieces or products, and thus gives rise to 
the modern system of " interchangeable parts," permitting 
the broken parts of machines to be replaced at once by 
exactly similar pieces. Were this not possible, the broken 
parts of a machine could be replaced only at great cost, by 
sending them back to the manufacturer or by bringing a 
highly skilled mechanic to the machine. 

(7) Machinery weakens the barriers between different 
trades, because many machines which are in use in one in- 
dustry are similar in general character to those used in many 
other industries. " Most of the operatives in a watch factory 
would find machines similar to those with which they are 
familiar if they strayed into a gun-making factory or sewing- 
machine factory, or a factory for making textile machinery v 
(Marshall, as above). 

But the problem of machinery, viewed in its widest and 
fullest significance, is so important and has given rise to so 
much controversy that we shall devote a separate section to 
its consideration. 



110 PRINCIPLES OF POLITICAL ECONOMY 

VII. Whether Machinery is detrimental to the Working 

Classes 

The classical economists who sought to prove that in our 
economic organization there could be no conflict between the 
interests of society and those of the individual, endeavored to 
show that machinery does more good than harm to the working 
classes. The three classical arguments are the following : — 

(1) Machinery lowers prices. Every mechanical inven- 
tion lowers the cost of producing an article, and consequently 
lowers its value. By the subsequent fall in prices, the work- 
man gains an advantage as consumer that is equivalent to 
his loss as producer. 

To this argument we must reply that the compensation in 
reduced prices will not exist if the product in question is 
not one consumed by the worker ; and this is certainly possi- 
ble. The manufacture of p certain lace fabrics by means of 
machinery will lower the price of these goods ; but as the 
poor woman who made them originally by hand is not accus- 
tomed to wearing that kind of goods, the fall in price is no 
compensation to her. 
. Even admitting that the product in question is ordinarily 
consumed by the worker, it may, nevertheless, form so small 
a part of his expenditures that the fall in prices is only an 
insignificant saving. The woman who knits stockings and 
who loses her employment because of the invention of knit- 
ting machines, will not readily find much consolation in the 
prospect of being able hereafter to buy her stockings cheaper 
at the hosier's. 

In order that the compensation supposed to exist be a real 
one, mechanical progress would have to take place simulta- 
neously in all branches of production, so that the consequent 
fall in prices would be general and simultaneous. In this 
case it might correctly be said that it matters little to the 
workman that he receives only half his former wages, since 
all his expenses are also reduced by half. But we have 



MACHINERY AND THE LABORER 111 

already pointed out that mechanical inventions are not 
applied to an equal extent in all branches of production, but 
only in a small number of them, and that they affect but 
slightly the cost of the important necessities of a workman, 
viz., food and housing. 

(2) The increase of production. The optimists claim that 
every mechanical invention causes a fall in the price of goods; 
lower prices must involve larger sales and increased produc- 
tion, and the final result is always to give new employment to 
the workmen that have been temporarily displaced. Instead 
of taking work from them, inventions make work for them. 
Many examples of this may be mentioned, among them 
the invention of printing ; owing to the increase of books 
since the invention of printing, how many more printers 
there are now than there were copyists in the Middle Ages ! 1 

To this we may answer, first of all, that although an 
increased sale is frequently a consequence of lowering prices, 
this is by no means always the case. It is notably not the 
case under the following circumstances : (#) Whenever a 
commodity is used to satisfy a want that is limited. The ex- 
ample of coffins has become classical. No matter how cheap 
coffins have become, most of us have no use for more than 
one. There are many other products, such as wheat and 
salt, the consumption of which would scarcely be increased 
by a fall in prices. There are, moreover, articles of luxury 
which would be less in demand if their prices should fall 
considerably, (b) Whenever one industry is bound up 
with another a fall in prices has little effect on the amount 
sold. This is a very frequent case. The production of wine 
bottles and casks is limited by that of wine, and no matter 
how low the price of bottles and casks may fall, no more of 
them will be sold if there is no more wine to put in them. 

1 In England the number of workers employed in manufacturing cotton 
textiles in 1835 was 220,000. To-day there are more than 500,000. Yet 
it is in this very line of work that machine-industry has made the most 
progress. 



112 PRINCIPLES OP POLITICAL ECONOMY 

Similarly, the production of watch-springs is limited by that 
of watches ; the production of rivets by that of boilers, etc. ; 
and that of boilers by other causes than the price, — such as 
the development of metallurgy, transportation, and mining. 

Moreover, even admitting an increase in consumption pro- 
portionate or more than proportionate to the fall in prices, it 
will require a long time — perhaps generations — before this 
increase is effected. It takes time for the old prices to fall, 
especially since the dealers and manufacturers are not eager 
to make the change, and the public is accustomed to the 
old prices. Competition among producers finally will cause 
them to fall, but rival industrial establishments are not 
built in a day. Still more time is necessary for the fall in 
prices to extend the market to those lower strata of society 
that do not change their habits or their wants in a short 
time. While all this is slowly being accomplished, what 
shall the workman do who has lost his employment ? Per- 
haps his grandchildren will profit by the change of condi- 
tions ; but for him there is little consolation. 

(3) Economy of labor. The use of machinery that econo- 
mizes manual labor necessarily involves, it is maintained, a 
gain for some one. This gain is realized either by the pro- 
ducer in the form of increased profits if he continues to sell 
his goods at the old price, or by the consumer, in the form of 
reduced expenses if, as is probably the case, the price of the 
article falls to the level of the new cost of production. The 
money that was previously paid to the workmen that are now 
without work is not lost ; it is either in the pocket of the em- 
ployer or in the pockets of the consumers. If this is the case, 
what will be done with it ? It will be invested or spent ; 
there is no other alternative. In either case the money will 
encourage industry ; it will develop production either by 
increasing the consumption of old products and inaugurat- 
ing that of new products, or by providing new capital for 
productive enterprises. 

Ultimately, then, the optimists contend, every mechanical 



MACHINERY AND THE LABORER 113 

invention " sets free " not only a certain amount of labor, but 
also a certain quantity of capital ; and as these two elements 
have a great affinity and cannot do without each other, they 
will end by combining. 

This is the argument that Bastiat advances. It is valid 
from an abstract/'di' view, but we must ask: Where and 
when will this combination of labor and capital be effected ? 
Perhaps in ten years ; perhaps at the other end of the world. 
Possibly the consumer will use his savings to help dig a 
canal at Panama or build a railroad in China. Capital, when 
once set free, can easily find investment ; it is nowadays 
readily transportable and can be applied almost anywhere. 
Unfortunately the workman cannot so easily be moved. He 
is not fit for every kind of work, nor can he go to distant 
parts of the earth in quest of employment. In the long run 
he will of course change his place of work or his occupation, 
but the process may be a long and unpleasant one. And if 
the change becomes necessary with every new invention of 
machinery, workmen will be constantly out of employment. 
The natural effect of a permanent army of unemployed 
workers, often numbering from ten to twenty per cent of the 
laboring population, weighs on the market and lowers the 
wages of labor. 1 

In a word, all economic progress, whether it consists of 

1 The data regarding the number of unemployed laborers in this country 
are generally unsatisfactory. In 1890, at the Federal census, it was shown 
that out of the total number of persons ten years of age and over engaged in 
gainful occupations, the number unemployed during the entire census year 
was 1,139,672, or 5.01 per cent of the total number engaged in gainful 
occupations. 

There is an article in the Quarterly Journal of Economics, Vol. VIII, 
taking a less favorable view of the situation. According to this article, the 
number of unemployed in 38 cities in 1893 is estimated at 523,080 ; upon this 
basis the number in the whole country would doubtless reach 1,600,000. 

Regarding the share of labor since the introduction of machinery, there 
are some significant statements made in the latest United States Census. In 
Vol. VII, pp. cxxiii-iv, it is declared that machinery lowers the total wages 
of the group of laborers in many industries, and also reduces the average rate 
of wages. 



114 PRINCIPLES OF POLITICAL ECONOMY 

mechanical inventions, or methods of organizing labor, or sys- 
tems of exchange, can have no other effect than to render 
a certain amount of labor useless. As the organization of 
modern societies is founded on division of labor, which re- 
quires that each man perform a particular kind of work, this 
progress — whatever may be its nature — must make some 
one's labor useless, and thus rob him of his livelihood. Here 
lies the great difficulty. 

Must we, therefore, — as Ruskin and his disciples maintain, 
— preach to men the abandonment of steam-engines and ma- 
chinery, and return to manual labor and more humane natural 
forces, like those of wind and water ? It is doubtful whether 
such advice would be followed. There are, nevertheless, rea- 
sons for believing that the great economic and mechanical 
transformation witnessed by the nineteenth century is draw- 
ing to a close, and that our grandchildren will not be troubled 
by the same social upheavals as have recently occurred ; it is 
probable that they will be able to live a calmer life than we, 
a life more like that of our grandfathers. 

Indeed, history demonstrates that in the economic evolution 
of humanity, periods of rapid change have been followed 
by long periods of a more or less stationary nature. It is 
therefore probable that the great economic revolution of the 
present will be succeeded by a long period of rest, or at 
any rate of very gradual progress, like that of the thousand 
years that preceded it. The invention of the steam-engine 
has already produced most of the consequences that can be 
expected of it. Does any one object that new social trans- 
formations will be caused by new inventions? If so, how do 
we know ? And even if such a prediction were realized, it 
is not probable that the substitution of some undiscovered 
device for the steam-engine would produce a revolution 
comparable to that caused by the substitution of steam- 
engines for manual labor. Within half a century the whole 
world will be girded and interlaced by a network of 
electric telegraphs and railroads. This is a transformation 



MACHINERY AND THE LABORER 115 

that is nearly accomplished now, and that need not be 
repeated. 

Let us assume that balloons will be made capable of direc- 
tion. Is the transportation of goods and travellers by 
balloon likely to have the same economic consequences as 
replacing wagons by railroads ? Finally, in a few years 
hence, the human race will be settled on all the space that is 
available on the surface of the earth ; there will be no more 
vacant lands, and the economic perturbation caused by the 
competition of new countries in the markets of the Old World 
also will be terminated. The present social transformation, 
therefore, probably will soon be completed, and doubtless 
will be succeeded by a period of more gradual change. 1 

1 John Stuart Mill, in a remarkable chapter of his "Political Economy" 
(Book IV, Chapter 6), refers to " the impossibility of ultimately avoiding the 
stationary state — this irresistible necessity that the stream of human industry 
should finally spread itself out into an apparently stagnant sea." He de- 
clares himself inclined to believe that the stationary state of capital and 
wealth "would be, on the whole, a very considerable improvement on our 
present condition." 



CHAPTER III — CAPITAL 

I. The Two Concepts of Capital 

No economic concept save that of value has given rise to so 
many theories as that of capital. All the theories of capital, 
however, may be brought under two headsf representing two 
great opposite tendencies. The first is that of the classical 
economists ; the second that of the socialists. The former 
we shall outline first. 

(A) Numerous authors have invented stories of the Robin- 
son Crusoe type, with a view to showing us how man origi- 
nally grappled unaided with the difficulties of existence. But 
not one of these authors has failed to provide his hero with a 
few tools or provisions, usually saved from a shipwreck. 
These writers knew perfectly well that unless they did this 
the story would have had to stop at the second page, for the 
life of their hero could not have lasted longer. Yet what 
would Robinson need ? Had he not the ability to work, and 
all the resources of the fruitful virgin soil upon which novel- 
ists wisely stranded him ? Yes ; but there was still some- 
thing lacking, and as the romantic hero could not do with- 
out it, writers were obliged to devise some scheme by which 
he might obtain it. This requisite thing was capital. 

But it is unnecessary to imagine the romantic situation of a 
Robinson Crusoe in order to be convinced of the utility of 
capital. The same state of things prevails in actual every- 
day society. There is no problem more difficult to solve than 
how to acquire something when one possesses nothing. Take 
a common laborer, a man without means. How can he earn 
his bread ? He cannot engage in any productive enterprise, 
not even that of a poacher, for a poacher needs a gun. He 

116 



CAPITAL 117 

cannot even become a burglar, without implements. He 
might render slight services, such as running errands or 
opening the doors of carriages in front of the theatres ; but 
this is more like begging than like productive work. He 
would be as wretched, as helpless, and as sure to die of star- 
vation, as a Crusoe who had saved nothing from the wreck, 
were it not for the wage-system that enables him to enter 
the service of some one provided with capital who is willing 
under certain conditions to furnish him with the food and 
the tools that are requisite for production. 

Animals doubtless depend on their "labor" and on nature 
to obtain food and to satisfy their other wants. Primitive 
man was necessarily in the same situation. The yeiy first 
capital that man possessed must have been made without the 
aid of other capital. At some time or other, man, worse off 
than Robinson on his island, must have solved the difficult 
problem of producing the first wealth without the help of any 
preexisting wealth. He was originally reduced to the need 
of starting the whole onward movement of human industry 
by the aid of his hands alone. Once started, however, the 
most difficult step was taken, and human industry has ever 
since then progressed with increasing rapidity. The first 
pointed stone that was picked up, the flintstone of the an- 
thropopithecus, served to help make other new implements 
under conditions more favorable to production ; and these in 
turn helped to prepare the way for still more discoveries. 
The ease of production increases like a geometrical progres- 1 
sion, and is proportionate to the amount of wealth already 
produced. It is well known that although, after a certain | 
point, a geometric progression increases very rapidly, the 
increase is very slow at the beginning. Similarly, our mod- 
ern societies, living on the wealth stored up by a thousand 
generations, find it easy to increase all kinds of wealth ; yet 
they should not forget how slow and perilous at the outset 
this process of accumulation must have been. How many 
centuries must have been required for man to traverse the 



118 PRINCIPLES OF POLITICAL ECONOMY 

epochs of hewn stone and of polished stone, and to lay up the 
first supply of capital ! There is no doubt that millions must 
have perished of misery during this dangerous period. Only 
a few select races have been able to traverse it and thus rise to 
the rank of truly capitalistic societies. Ad augusta per augusta. 

(B) The second theory of capital, as formulated by the 
socialists, especially by Karl Marx, Lassalle, and the collec- 
tivists, is as follows : — 

The definition and origin of capital are entirely different 
from the above explanation. Capital is not merely the in- 
strument of production, but all wealth which serves to provide 
its possessor with an income independent of his labor. We 
must acknowledge that this definition corresponds better to 
the general idea of capital, i.e. that which furnishes an income. 
But it evidently presupposes a specific economic and social 
organization, especially the fact that capital may be loaned 
at interest or may be employed to give work to people who 
are glad to hire themselves out for wages. Now this par- 
ticular social organization does not exist everywhere; it is 
of quite recent origin, and in Europe dates from the six- 
teenth century. A proof of this lies in the fact that the very 
word " capital " was not used previously. The ruin of small 
industry and small farming, the expropriation of the masses, 
and the creation of a permanent class of wage-workers, — all 
these things had to be accomplished before capital acquired 
the power to command the labor of others and to provide its 
owner with an income not due to any work of his own, un- 
less we regard as work the task of watching over one's pos- 
sessions and collecting profits. 

This is why socialists find the comparison of capital to the 
bow and arrow of the primitive savage, or to any tool in the 
possession of Robinson Crusoe, simply ridiculous. It is in- 
deed evident that neither the savage nor Robinson could have 
obtained an income with these implements : hence they were 
not capital. The socialists ridicule what might be called the 
naturalistic concept of capital, and substitute for it the his- 



CAPITAL 119 

torical concept, which regards capital not as a permanent or 
necessary institution but as the result of history. They re- 
gard capital as a " historical category " — as Rodbertus would 
say — ■ which made its appearance at a definite period of his- 
tory, and which will disappear in due time. 

The violent opposition between these two theories is 
largely due to the fact that efforts have been made to use 
them as weapons of social warfare, the first being employed 
to justify the role of capital and the second to discredit it. 
The first school exclaims : How useful capital is, since even 
Robinson Crusoe could not have lived without it ! And the 
second replies : What a tyrant capital is, since it lives only 
on the labor of others ! Such arguments as these are ethical 
in nature, and need not be considered until we reach Book 
III, on the Distribution of Wealth. The only point which 
concerns us now is the true function of capital in the pro- 
duction of wealth. 

Now, there is no necessary contradiction between these 
two theories, since the one regards capital in its natural, 
permanent, sociological characteristics, while the other con- 
siders its acquired, relative, historical nature. Both may be 
true, and, in fact, each of them contains part of the truth. 

It is certain that the part played by capital has been 
modified by economic evolution. First it was the simple 
tool of the manual laborer ; later it gradually passed out of 
his possession and came into that of the wealthy members 
of society. Whereas it was at first simply an instrument of 
production, it is now often made an instrument of money- 
making and the means of obtaining an income without work- 
ing. This new state of society is what the socialists call 
"capitalism." 1 But although it may be admitted that 

1 It has been said that each of the three factors of production has in turn 
exerted a preponderant influence. In primitive societies of hunter, fisher, 
and shepherd peoples, nature is the all-important factor. In Antiquity and 
the Middle Ages labor was the most important factor ; in modern industrial 
societies it is capital. 



120 PRINCIPLES OF POLITICAL ECONOMY 

" capitalism " will some day disappear, capital will still 
remain. 

The definition given by the classical economists is there- 
fore better, precisely because it emphasizes those features of 
capital that are essential and necessary, while the other defi- 
nition points out only its accidental and ephemeral character- 
istics. 

The fact that no wealth can be produced without the help 
of preexisting wealth is an economic law whose importance 
cannot be exaggerated. Just as fire cannot be started with- 
out the use of some ignited substance, just as an explosive 
mixture will not explode unless a lighted fuse or similar 
contrivance be brought near it, just as a living being can- 
not be produced without the presence of some preexisting 
living substance (germ, cell, or protoplasm), similarly wealth 
cannot be produced, under ordinary economic conditions, 
without the help of a certain amount of preexisting wealth 
which plays the same part as the fuse does in starting explo- 
sions. Now it is necessary to give a name to this preexist- 
ing wealth, the function of which is so important and so 
well-defined. We shall call it "capital." If socialists dis- 
like the name, they have the right to propose another ; but as 
they have not done so, we may for the present retain this one. 

II. The Distinction between Wealth which is Capital and 
Wealth which is not Capital 

All wealth must be applied in one of two ways : either to 
serve for consumption, or to serve for production. 

Wealth serves for consumption when it is used directly to 
satisfy some of our wants, — to afford us some gratification. 
It is unnecessary to enumerate the wants and enjoyments for 
which wealth is used, as an enumeration would have to in- 
clude all that is placed on our table, or used in our house, or 
that contributes in any way to our immediate pleasure. But 
this category of wealth is not the largest ; there are other 



CAPITAL 121 

kinds of wealth quite as important. Some wealth is incapa- 
ble of being used directly to afford gratification, since it is 
employed to produce other kinds of wealth (namely, wealth 
of the first category). Another part of it consists of instru- 
ments unfit for any kind of personal consumption. Still 
another part exists in the form of raw material, which can 
be consumed only after having undergone certain transfor- 
mations. These are the kinds of wealth that fill our factories, 
farms, railway stations, docks, etc. To this second category, 
consisting of wealth not directly usable, we give the name 
capital, to distinguish it from the first category. 

But the above classification, which seems to be very simple 
at first sight, requires some explanation. 

Above all, we must not believe that all wealth may, by 
reason of its specific qualities, be classed invariably in one 
or the other of these two divisions. Any object having 
value may become capital, provided certain conditions are 
fulfilled. The idea of capital does not connote a certain class 
or kind of goods, but a certain condition or purpose of goods. 
All wealth may at some time or other become capital, just as 
every physical element may, at a certain degree of tempera- 
ture, become a gas. Now the feature, condition, or purpose 
that makes wealth capital is that it is used by labor produc- 
tively. Thus a diamond in the hands of a jeweller or a glazier, 
flowers in the possession of a florist, a clown's costume owned 
by a theatrical director, all become capital, because they are 
instruments of production. Perhaps it may be objected that 
they do not produce any new wealth, and are therefore not 
useful to society. To this we must reply that they are no 
more and no less useful than the occupations in which they 
serve either as accessories or as raw material. It may indeed 
be urged, from a moral and social point of view, that the 
work of jewellers, florists, and actors is useless ; in which 
case we must refer back to the discussion regarding the dis- 
tinction between productive and unproductive labor. These 
services (of actors, etc.) satisfy a desire and have a value; 



122 PRINCIPLES OF POLITICAL ECONOMY 

hence they are productive in the economic sense of the term, 
and, consequently, the implements employed in these occupa- 
tions are also productive in the same sense. 1 

Nor is this all. It should also be noted that some kinds 
of wealth, even when used not productively but for con- 
sumption, may, nevertheless, bring an income to their owner 
by means of hire or rent ; for example, a rented villa, hired 
furniture, or money loaned to a spendthrift, or even to a 
government (which generally offers a still more striking 
instance of unproductive consumption). Must not wealth, 
in this case, also be called capital ? We do not hesitate to 
call it capital in everyday language, and we are justified in 
doing so, provided we are careful to indicate the difference 
between this kind of capital and the preceding kinds, by 
means of some qualification which enables us to keep them 
apart. As a matter of fact, these kinds of capital are very 
dissimilar. As the last-mentioned capital is not in the service 
of labor, it produces nothing of itself, — neither new wealth 
nor new value. Hence we naturally ask : Whence comes 
the income which this capital provides for its owner ? It 
conies from the pockets of the borrower or the tenant, who 
is obliged to procure it by his own labor or by employing 
some other capital productively. Such capital as this Ave 
shall call lucrative capital? 

To sum up, then, there are three kinds of wealth : — 

(1) That which serves only for consumption and which 

1 Besides, if it were necessary to introduce such non-economic considera- 
tions as morality or social usefulness in the narrower sense, it is evident that 
machines which serve in the production of cannon or armor for cruisers must 
be declared absolutely unproductive, and it would also be necessary to 
remove three-fourths of our metallurgical plants from the list of capital. 

2 Boehm-Bawerk, in his remarkable book on " Capital and Interest," 
approves this classification and terminology ; but he also calls productive 
capital "social capital," and lucrative capital "individual capital." He 
means that only the former kind is capital for society, the latter being capital 
solely for the individual. But this terminology is likely to cause error, 
because lucrative capital cannot be conceived as existing save in society, 
while productive capital might exist even for a Robinson Crusoe. 



CAPITAL 123 

is not capital, although it may at any time become 
capital. 1 

(2) That which, like the preceding, serves only for con- 
sumption, but which, nevertheless, gives its owner an income 

1 In making an inventory of the riches of a country, this wealth is counted 
as virtual capital. Some categories of wealth have given rise to many 
controversies. 

In ordinary language we designate as " capital " (as opposed to immovable 
property) all movable or personal values represented by shares of stock, 
bonds, etc. But these values are only representative capital ; i.e. they 
represent real capital invested in mines, railroads, industrial plants, etc. 
We must, therefore, take care not to count them twice in the inventory of a 
nation's wealth, — once as valuable documents, and again as the really 
existent wealth which they represent. Often they are really only lucrative 
capital, in the sense which we have given to this term ; that is to say, they 
do not correspond to any real capital at all ; such, for instance, are govern- 
ment bonds. 

On the other hand, in ordinary language the name "capital" is never 
given to immovable property, like land and buildings. As for land, it should 
certainly not be called capital when we mean unused land as provided by 
nature, for this would be to confound nature and capital ; but whenever land 
is modified by cultivation, we may well ask whether it does not then fall 
under the head of productive capital, since it is then a product of nature and 
labor and undoubtedly serves to produce new wealth. 

Buildings are, on the contrary, essentially only objects of consumption, 
since, like food and clothes, they are products in their final form, having no 
other purpose than to satisfy human wants. But they may become lucrative 
capital for their owners if they do not occupy, but rent them ; they may 
even become productive capital if they are not used for habitation but for 
production, i.e. as workshops, stores, etc. 

It must be admitted that the above statement has been vigorously denied. 
Many economists contend that a house, even when used for residence, is 
always capital, because it always produces an income in the shape of shelter, 
comfort, and the advantages it gives. But, from this point of view, the arm- 
chair in which I sit, the glass of wine which I drink, should also be called 
capital productive of income, because they render me a service or an 
advantage. Indeed, some economists have gone as far as this (Walras and 
Irving Fisher) . 

What is to be said of money, of coin ? For a nation it is always capital. 
For an individual, it is or is not capital, according to the use made of it. 
There are, however, authors who maintain that, even for individuals, money 
is always capital, because it can never be consumed directly, but only after 
being exchanged for objects of consumption. 



124 PRINCIPLES OP POLITICAL ECONOMY 

derived from the income of others. This we call lucrative 
capital. 

(3) That which is actually employed in production, and 
which we shall therefore call productive capital. 

In this chapter on production we really have to do only 
with the last kind of wealth. The other kinds will be dis- 
cussed in the sections on Distribution. 

III. What is meant by the " Productivity " of Capital? 

The part played by capital in production has given rise to 
unfortunate misconceptions. It is customary to say that 
capital yields an income. This seems to be an essential part 
of its nature, just as trees naturally bear fruit or as hens 
naturally lay eggs. Hence the income provided by capital 
is regarded as a product due exclusively to capital. The 
spread of this false notion is partly due to the fact that a 
vast amount of capital is in the form of securities, bonds, or 
shares, to which coupons are attached representing the inter- 
est that falls due every year or every six months. The coupons 
" grow " in value as time advances, and when the day of pay- 
ment comes they are detached and collected. Just as a fruit 
or seed can be sown again to produce new fruit or seed, and 
just as a newly laid egg can be made to produce another hen 
for laying more eggs, so these coupons may be used as new 
capital and invested in such a way as to provide new interest- 
coupons. Thus it may seem that capital grows and in- 
creases according to the same laws as those that govern the 
multiplication of plants and animals. But the law of com- 
pound interest (this is the name given to the above-mentioned 
multiplying process of capital) is even more marvellous than 
the multiplication of animal organisms. It has been calcu- 
lated that a single cent, invested at compound interest on the 
first day of the Christian era, would by now have yielded a 
value equal to that of some thousand million globes of solid 
gold as large as the earth. 



CAPITAL 125 

We must nevertheless abandon the idea of the natural pro- 
ductivity of capital, — an idea which has aroused the more or 
less justifiable ire of the socialists. This mysterious produc- 
tive and generative power, attributed to capital as part of its 
nature, is a pure chimera. Notwithstanding the popular 
belief to the contrary, money does not produce money, capital 
does not produce capital. Not only has a bag of money never 
produced a single cent, as Aristotle remarked long ago, but a 
bale of cotton or a ton of iron never has produced any cotton 
or iron. Capital is inert matter, and by itself is absolutely 
sterile. But when it is put in the service of labor, as we have 
seen in the preceding chapter, it gives labor a degree of pro- 
ductivity that may be very great. With a horse and plough, 
a farmer can produce much more wheat than with his manual 
labor alone. It is this increased or supplementary crop that 
constitutes the income from capital. It does not arise from 
the plough ; it is due to the man aided by the plough. 

What leads us astray is the fact that we see many persons 
living on their income, and even growing richer, without 
working. Hence it appears that their income arises from 
capital, and is spontaneously produced by it. In reality, this 
income is the product of labor, — labor which we do not see 
but which is not difficult to find, viz., the labor of those who 
borrowed the capital of its owner and who employ it produc- 
tively. There can be no doubt about this. The coupons rep- 
resenting the interest on the bonds of a coal-mining company 
represent the value of coal extracted by the labor of miners ; 
the coupons of railway bonds represent the result of the 
labor of mechanics, conductors, brakemen, station-masters, 
switchmen, etc., who perform the work of transportation. 1 

1 It is for this reason that socialists draw the conclusion that the profit 
given to the capitalist constitutes a social injustice. This may indeed be the 
case ; hut it is not necessarily so, for we have shown that without the aid of 
wealth, labor is doomed to remain sterile. Consequently, every laborer who 
has not the good fortune to possess wealth is obliged to borrow it in some 
way or other ; and it seems natural and legitimate that he should pay for its 
use. 



126 PRINCIPLES OF POLITICAL ECONOMY 

It is, however, possible that the capital in the hands of the 
borrower has been dissipated or consumed unproductively. 
In this case the interest received by the lender no longer 
represents the product of the borrower's labor but the labor 
of some other person, whose identity is still to be sought, but 
who nevertheless exists somewhere. The coupons of govern- 
ment bonds, for example, do not represent wealth produced 
by the labor or industry of the state, since the state produces 
but little and is even in the habit of expending unproductively 
the greater part of the capital lent to it ; but these coupons 
do represent the labor of all the citizens who each year pay 
into the public coffers taxes which, in the form of interest, 
pass into the possession of the creditors of the government. 
So also, when a young man borrows money to spend f oolishhv, 
the interest which he pays to the money-lender certainly does 
not represent the product of his own labor, but perhaps that 
of the workmen in his employ, or of the farmers on his estate. 1 
(See what we have said regarding lucrative capital, on page 
122.) 

1 Boehm-Bawerk, in his explanation of the nature and function of capital, 
points out that the ultimate purpose of production is to furnish goods lor 
consumption, and that this may be done in two ways : directly and indirectly. 
The direct way is immediately to unite the forces of nature with our own 
efforts, and thus produce what we want. The indirect or roundabout way is 
first to produce means of production, i.e. such tools or devices as will ulti- 
mately augment our productive powers. Take, for example, the case of a 
thirsty farmer ; he may go to the neighboring spring and drink out of the 
palm of his hand whenever he is thirsty. This method, however, is incon- 
venient ; he must go several times each day, and he cannot hold much 
water in the palm of his hand. He may stop to make a bucket, and thus 
take away enough water to satisfy his thirst for a whole day. But, in order 
to do this, he must first get the wood and devote several hours to cutting 
it into shape. There is, however, even a more roundabout but more perfect 
process. The farmer may cut down a number of trees in the forest, make 
wooden pipes of them, have them carry the water to his house, and in this 
way procure a constant stream of water at his very door or within his house. 
The last process is of course the longest and most roundabout method, but it 
is ultimately the best ; it is production by means of capital, capital being the 
name of the intermediary products by means of which we ultimately obtain, 
under more favorable conditions, the things we want. 



CAPITAL 127 



IV. The Durability of Fixed and of Circulating Capital 

Capital may last for a long or a short time. According to 
its duration it will serve for a larger or smaller number of 
productive acts. Capital which can be used only once, 
because it is consumed in the act of production, is called 
circulating capital; examples of this kind of capital are : the 
wheat that is sown, manure that is mixed with the soil, coal 
that is burned, cotton that is spun. Capital that can be 
used to serve for several productive acts is called fixed 
capital; it may include the most fragile implements, such 
as needles, and the most durable kinds of wealth, such 
as canals or tunnels, which last as long as the world. 1 

Whenever it can be done, there is great advantage in 
employing capital of long durability. However considerable 
may be the labor required by its production, and however 
slight may be the labor saved each year by the assistance of 
this capital, there must necessarily come a time, sooner or 
later, when the labor saved will equal the labor originally 
expended. When this point is reached, and when — to use 
the customary expression — capital is "redeemed," the labor 
subsequently economized will be a net gain for society ; from 
that time onward, and for the whole period of its duration, 
the service rendered by capital will be gratuitous. The 

1 It should be pointed out that Adam Smith, who first used these terms, 
" fixed " and " circulating" capital, used them in a somewhat different sense. 
He understood by circulating capital that which provides an income only by 
circulating, i.e. by changing hands, by being exchanged {e.g. merchandise 
and money). By fixed capital lie means that which returns an income with- 
out being exchanged, and which stays in the same hands {e.g. a factory). 
This definition seems scarcely satisfactory, since it would lead us to declare 
that coal burnt by a manufacturer in his furnaces is fixed capital (since it is 
not intended for sale) whereas houses owned by a building society that buys 
them to sell would have to be regarded as circulating capital. In other words, 
for Adam Smith the essence of circulating capital lay in the change of owner- 
ship; in the definition we have adopted, it is to be found in the change of 
nature. 



128 PRINCIPLES OP POLITICAL ECONOMY 

progress of civilization tends always to replace capital of 
less durability by capital of greater durability. 

Three points, however, should not be overlooked : — 

(1) The formation of very durable capital generally requires 
an amount of labor proportionate to the increased durability. 
A certain equilibrium must therefore be sought between the 
labor-cost of the capital and its durability. We may say in 
general that the increased cost in labor usually is not so great 
as the gain in durability ; it is this circumstance that makes 
the use of such capital profitable. 

(2) The formation of fixed capital demands the present and 
immediate sacrifice of a large amount of labor and other 
commodities, while the remuneration anticipated in econo- 
mized labor or economized expense is more or less distant in 
the future. The return for capital, moreover, is all the 
more distant when it is of great durability. Take a con- 
crete example. If the construction of a canal, such as the 
Panama Canal, is to cost 8140,000,000, and the time for the 
repayment of this sum is fifty years, we must compare these 
two items : on the one hand an immediate expenditure of so 
large a sum, and on the other hand a remuneration for 
which we must wait half a century. Now to make any such 
comparison as this, considerable foresight and not a little 
boldness are necessary. It requires, moreover, firm faith in 
the future. These are qualities that are found only in highly 
civilized communities. Peoples whose social state is not 
advanced and whose political organization affords but little 
security, rarely employ large amounts of fixed capital ; all 
their wealth takes the form of articles for consumption, or of 
circulating capital. 

Even under the most favorable circumstances, the faculty 
of foresight is limited. An individual, a company, or even 
a government, would not consent to advance capital which 
will not be paid back for two centuries, although it may be 
certain that this capital could last for a thousand years and con- 
sequently render gratuitous services for eight hundred years. 






CAPITAL 129 

Why ? Because results that are not entirely attained for so 
long a period as this, do not fall within the scope of human 
predictions. As a general statement of fact we may lay down 
the rule that capital which is not repaid in the course of a 
generation is regarded as poorly invested. 

(3) It must finally be pointed out to the disadvantage of 
fixed capital that, if its durability is too great, it runs the risk 
of becoming useless. Therefore great prudence should be 
exercised in our estimate of future results. The mere mate- 
rial durability of capital is not nearly so important as the 
period of its utility. We can generally tell how long a tun- 
nel will last, but we do not know how long traffic may be 
expected to continue taking the route that leads through the 
tunnel. Utility is very unstable ; what at one time is re- 
garded as the most useful of goods or institutions may at a 
subsequent time no longer be so regarded. Suppose we have 
built a canal, and before the capital sunk in it has been re- 
deemed, traffic may have taken another route ; in this case 
a certain quantity of labor will have been uselessly expended. 
Aware, then, of our ignorance of the future, it is prudent not 
to build for all eternity. The use of capital that is too durable 
must be regarded as ill-advised. 

V. How Capital is Formed 

Capital, being always a product, or, as Boehm-Bawerk says, 
an " intermediary product," can only arise, like every other 
product, from the two original factors of all production : 
labor and nature. All the kinds of capital that we can think 
of — tools, machinery, works of art, and materials of all 
classes — can have no other origin but this. 1 

There would be no need to stop and discuss so clear a mat- 
ter as the formation of capital, if the attempt had not been 

1 Karl Marx called capital "crystallized labor." His phrase would be 
accurate had he not, in adhering to his principle that all value springs from 
labor, purposely omitted the part played by nature in the formation of 
capital. 



130 PRINCIPLES OF POLITICAL ECONOMY 

made to base the formation of capital on a new agent, of a 
special nature, called saving. It is a popular bit of wisdom 
that we can grow rich only by means of labor and saving. 
We already know what labor is. But what is saving, this 
new element that is now introduced? Is it a third original 
factor of production, that we have neglected to mention? 
Certainly not, as labor and the forces of nature are the only 
conceivable creators of wealth. 1 Is it, then, a form of labor ? 
Some have maintained that it is. But what is there in com- 
mon between labor and saving? To labor is to act; to save 
is to abstain. 2 It is hard to conceive how a purely negative 
act, simple abstention from using, could produce anything. 
And when Montaigne declares that he knows "no action so 
potent and effective as this inaction," this may be true from 
the moral point of view, but it does not explain how inaction 
can create even the least valuable commodity. When wealth 
is said to have been created by saving, do we mean that if 
this wealth had been consumed as soon as it was produced, it 
would not now be in existence ? If so, it is a self-evident 
fact familiar to everybody. If a child asks where chickens 
come from, and we answer that in order to produce chickens 
we must refrain from eating eggs, this reply may be excellent 
advice, but it is an absurd explanation. The reasoning which 
regards saving as the original cause of the formation of capi- 
tal seems hardly more satisfactory : it amounts to saying 
that non-destruction is one of the causes of production, — an 
extraordinary sort of logic. 

This strange idea must have been occasioned by the use 
of money. To save, in modern societies, means to put aside 
a certain amount of money. Now the man who puts a hand- 
ful of coins in a safe certainly does not create either wealth 

1 Senior and some other economists expressly state, however, that the 
three agents of production are labor, natural agents, and abstinence. 

2 The opinion that saving is a form of labor is held by Courcelle-Seneuil ; 
but as he admits that the only object of the theory is to justify the social 
function of capitalists and the services they render, we need not stop to 
discuss it. 



CAPITAL 131 

or capital (be really withdraws some wealth from circula- 
tion), but since each coin represents a claim to a certain 
amount of existing wealth, it is evident that whoever accumu- 
lates these coins is putting aside for future use a certain 
amount of wealth quite as real as though he produced it by 
his labor. But this is a purely individual point of view 
from which to consider saving. 

It is impossible to name a single kind of wealth in society 
that has been created by saving. The stone axe cut by qua- 
ternary man was not the result of saving ; probably he was 
just as little able to reduce his consumption as the working- 
man of to-day who earns just enough to keep from starving. 
Not by reducing his consumption, but because of a particularly 
successful hunt, providing an unusually large food-supply, 
was he enabled to create his first capital. Is it reasonable 
to suppose that in order to pass from the state of hunters 
to that of farmers it was necessary for a nation first to save 
enough food to last a whole year ? Nothing is less probable. 
Hunting peoples simply domesticated their cattle, and with 
cattle as capital they first obtained the leisure necessary for 
undertaking agricultural labors that extend over long 
periods of time. But, as Bagehot pertinently inquires, how 
does a herd or flock represent abstinence ? Has its possession 
entailed privations on the part of the owner ? Certainly not, 
since the milk and the meat have fed him, and the wool and 
the hide have clothed him, better than he was fed or clothed 
before. 

It must not be supposed that we mean to question the 
merit or the virtue of saving. But although saving plays a 
part, and an important one, in consumption, we do not per- 
ceive what it has to do with production. It should be studied 
in its proper place. Probably no one would ever have 
thought of regarding saving or abstinence as one of the factors 
of production, had it not been felt, mistakenly, that this 
theory was necessary to justify the payment of interest for 
capital. 



PART II. THE METHODS OF PRODUCTION 

* 

CHAPTER I — THE ORGANIZATION OF 
PRODUCTION 

I. The Stages of Industrial Evolution 

Besides its other merits, the historical school may claim 
the credit of having discovered and outlined the successive 
types of industrial evolution. 1 It is customary to distinguish 
five types or periods : — 

(1) The home economy or family economy. This system 
prevails not only in primitive societies but even in those of 
antiquity, and extends as far as the first period of the Middle 
Ages. Under this system the people are divided into small 
groups, each one of which is independent of the others from 
the economic point of view. Each group suffices unto itself, 
consuming hardly anything but what it has itself produced, 
and producing almost nothing beyond what it will consume. 
Exchange and the division of labor exist only in an embry- 
onic form. (See the pages on the History of Exchange and 
of Labor.) 

Each group consists of a family. The term "family," 
however, must be taken in a wider sense than it now pos- 
sesses. Not only was the patriarchal family itself much larger, 
but it was made to include many other persons, — slaves or 
serfs,- — who were regarded as belonging to it. In Rome 
slaves were legally designated &sfamilia. The residence of 
the wealthy Roman landowner, having an army of slaves 

1 More detailed outlines of the economic evolution of society maybe found 
in these books: Thurston, "Economics and Industrial History''' ; Buecher, 
"Industrial Evolution" ; Henry Dyer, " The Evolution of Industry." 

132 



ORGANIZATION OF PRODUCTION 133 

engaged in all kinds of labor, as well as the manor of the 
medioeval baron with his serfs, both belong to this economic 
period. 

(2) Corporative economy, or the guild system. 1 This system 
makes its appearance in the Middle Ages and is characterized 
by a very important feature, viz., the separation of trades. 
The worker, at least in the towns, is autonomous ; generally, 
he owns the raw material, and produces with the aid of tools 
that are his own property. He has become what is called 
an artisan. Ordinarily, he works only " to order," producing 
such goods as are requested in advance by his customers ; 
or, at least, he produces only for the small local market of 
the town in which lie lives, — a market which he jealously 
guards. He is associated with other workmen of the same 
trade, in a kind of league for mutual assistance and defence, 
and together with these associates he helps form those cor- 
porations or guilds which played so important a part in the 
economic, and even in the political, history of the Middle 
Ages. 

(3) Domestic economy (which must not be confounded with 
the home or family economy). The workmen in the guilds 
little by little lose their independence. Instead of producing 
directly for their customers or for the public, they now pro- 
duce for a wholesale dealer. They work at home, and some- 
times — not always — still own their tools and the raw 
material. But they no longer own the finished product ; that 

1 Between these first two systems, the German school of economists, espe- 
cially Schmoller and Buecher, introduce another which they call the system 
or period of hired labor, — in which the laborer, who was only partly indepen- 
dent, usually worked in the house of the consumer with raw material that 
was provided by the latter. This state of affairs was similar to the present 
habit of some small artisans who wander about from house to house, or the 
present custom among dressmakers in countries where they work in the 
homes of the persons who employ them. 

Although this system seems to have continued several centuries in Germany, 
before the establishment of the guild system, and is very interesting as a 
transitional step, it does not appear ever to have been sufficiently predominant 
to be regarded as a distinct sta<»e of economic evolution. 



134 PRINCIPLES OF POLITICAL ECONOMY 

belongs to the dealer. Why is this intermediary, the dealer, 
interposed between the worker and the public ? Because the 
little town market has been destroyed and has perforce given 
way to the national market ; and because the workers of the 
guilds were too poor, too unenterprising, and produced at too 
great a cost to obtain control of this enlarged market. 

(4) Organized manufacture, or the workshop economy. 
The intermediary or industrial organizer now brings his dis- 
persed workmen together in one place. Thus he gains sev- 
eral advantages, principally that of an extensive division of 
labor, which increases productive capacity and at the same 
time reduces the cost of production. (See the section on the 
Division of Labor.) Henceforth, the worker owns neither the 
raw material nor the implements of production ; he no longer 
works at home, but has become a wage-worker, an employee, 
while the intermediary who possesses all these things has be- 
come an employer. But productive power has thus been 
increased to a remarkable degree. 

This transformation began to take place about the sixteenth 
century. It was not, however, without a struggle that the 
more perfect organization of manufacturing industry elimi- 
nated the guilds and conquered the markets which were closed 
to it by the guild regulations. In France the intervention 
of the government was necessary to accomplish this change. 
During the ministries of Sully and of Colbert the government 
founded manufactories possessing special privileges, and some 
of these establishments have remained state concerns ever 
since then (e.g. the Gobelin manufactory of tapestries). 
In England the destruction of the guild system was brought 
about chiefly by the exportation of goods on a rapidly in- 
creasing scale to foreign countries and British colonies. 

(5) Machine industry or the factory system. 1 This is the 
system which marks our own epoch. It began with the 

1 M. Vandervelde, a Belgian economist, suggests the name " machinofac- 
ture " as opposed to the preceding type of " manufacture.' 1 Etymologically, 
"manufacture" means "to make by hand." Now it has come to mean 



ECONOMIC EVOLUTION 135 

application of steam to industry and transportation. 1 It has 
carried productive power to its maximum, but has for the 
most part only emphasized the features of the preceding 
period, among which are : the grouping of large numbers 
of laborers, night work, the quasi-military organization of 
labor, the employment of women and children. 2 As this 
system requires constantly increasing amounts of capital for 
its successful continuance, it perpetuates what the socialists 

precisely the opposite. The word "factory" originally was merely an 
abbreviation of "manufactory. " Four bases of distinction between manufac- 
turing and the hand trades have been suggested by various writers ; namely, 
the use of power, the use of machinery, production for the general market, 
and production under a system of division of labor. All of these are un- 
doubtedly characteristics which are usually associated with manufacturing, 
but no one of them alone sufficiently defines the word. The twelfth census 
of the United States regards standardization as the true criterion for manu- 
factures, as opposed to hand trades. This term, "standardization," applies 
to all operations which produce "standard" products; that is, similar 
products which conform to a general demand. Tailoring and custom shoe- 
making, for example, are not standardized, for dissimilar articles are pro- 
duced, each being suited to the taste and need of the individual consumer. 
But the manufacture of ready-made clothing and shoes is standardized, for 
here the products all conform to a single standard, even the variations for 
sizes being standard variations. 

1 The remarkable improvement in methods of transportation, which we 
shall refer to later in this book, and the invention of a multitude of mechani- 
cal devices for increasing productive power, have together effected so com- 
plete a change in the economic life of mankind during the past century and 
a half that historians have designated it as the " Industrial Revolution." 

2 In 1870 the number of persons engaged in gainful occupations in the 
United States was 12,505,923; of these the females were 1,836,288, i.e. one- 
seventh of the total number of females ten years of age and over. In 1900 
the whole number of persons engaged in gainful occupations was 29,074,117, 
and of this number 5,319,912 were females, being one-sixth of the females 
ten years of age and over. In the mechanical and manufacturing industries 
2.53 per cent of the workers in 1870 were women, whereas in 1900, 4.65 per 
cent were women. 

Despite various forces tending to restrict the employment of young chil- 
dren, and frequent misrepresentation regarding the age of employees, the 
census figures indicate that in 1870, 13.19 per cent of the total number of 
children ten to fifteen years of age, inclusive, were at work ; in 1880, 16.82 
per cent, and in 1900, 18.23. 



136 PRINCIPLES OF POLITICAL ECONOMY 

call the regime of capitalism. This system has many grave 
defects, which form the subject of complaints that are too 
often justified. Among its objectionable features are : the 
frequency of accidents; the chronic unemployment and invol- 
untary idleness of large numbers of laborers ; overproduction 
and the crises it involves ; the creation, at one end of the 
social scale, of colossal fortunes, and, at the other end, of a 
famished laboring class often forced to sell its labor for a 
crust of bread, — while between these two classes there is 
a special category of property owners called stock-holders, 
which at first sight it is difficult to distinguish from simple 
parasites. All these objectionable features of capitalism will 
be discussed hereafter in greater detail. 

It is a mistake to suppose that each of the economic sys- 
tems outlined above did away entirely with its predecessors. 
We can only say that each of them in turn predominated. 
Even to-day, although the factory is the characteristic method 
of industrial production, we can still find traces of the home 
economy, — where, for example, the peasant's wife spins the 
flax that serves to make the household linen ; and although 
guilds have now disappeared from the European cities in 
which they once held sway, there are still many artisans, 
occupied in various trades, who work principally for custom- 
ers that order goods in advance, just as in the Middle Ages. 

It also goes without saying that we still find considerable 
production outside of the factories and other large industrial 
establishments, but it is especially " domestic economy " that 
has survived and that now, curiously enough, tends again to 
gain ground. In the large cities some important indus- 
tries — especially tailoring — are carried on almost entirely 
in this way. This strange revival of a former industrial sys- 
tem is due probably to the recent intervention of the legis- 
lative authorities, which have laid down certain rules for 
the conduct of labor in larger industrial establishments. As 
these labor laws apply especially to factories, many industries 



THE REGULATION OF PRODUCTION 137 

find that, by having the work clone in the homes of the 
laborers, they can easily escape legal surveillance. 

We might be disposed to believe that this change is a for- 
tunate one, and that the workman is happier and more free 
when he works at home, at times that best please him, and in 
the midst of his family, rather than in the industrial barracks 
known as " factories." Experience, however, proves that this 
is not the case ; that, quite to the contrary, the worst kind of 
exploitation takes place by the method of domestic production, 
to which nowadays the characteristic name of " sweating 
system " has aptly been applied. In this form of industrial 
organization the workman is not only robbed of the protec- 
tion of the laws concerning hours of labor, the work of 
women and children, necessary hygienic precautions, etc., 
but he is also entirely in the control of intermediaries or 
contractors, who are interposed between him and the large 
manufacturer, and who deprive him of part of the gain which 
his toil should bring him. He is, moreover, constantly ex- 
posed to the imminent clanger of losing employment, and to 
the risk of irregular work ; for whereas the proprietor of a 
factory, unable to close it without great loss, prefers to 
work at a small loss rather than allow his enormous capital 
to lie idle, the contractor under the sweating system has no 
care of this nature. 

II. How Production is Regulated 

Economic equilibrium exists when wealth and services 
are produced in just the quantity necessary to meet the 
demand. Not to produce enough is an evil, since a certain 
number of wants will be unsatisfied. To produce too much 
is another evil, perhaps not so great as the former, but 
none the less real. Every excess in production necessarily 
involves not only a waste of wealth, but also a useless 
expenditure of energy, and consequently unnecessary toil 
and trouble. A state of health in the social body, as in the 



138 PRINCIPLES OF POLITICAL ECONOMY 

human body, consists in the perfect equilibrium of production 
and consumption. 

When each man produces what he consumes, as in the 
first stage of economic evolution, described above, the equilib- 
rium is maintained easily enough. To a certain degree, each 
individual, and each small family group, is able to foretell the 
wants of the immediate future, and although this prevision 
may not always be strictly correct, production can be regu- 
lated accordingly. But when division of labor and exchange 
have been introduced, the problem is more difficult, for then 
it is necessary to foretell the wants of others, — a more com- 
plex matter than to foretell our own wants. Yet the problem 
is not very difficult when laborers work " to order," for then 
each consumer declares what he wants. Nor is the problem 
very difficult in small industries; the baker can estimate 
pretty accurately the number of loaves that will be sold in a 
day. 

But the problem really becomes complicated in an eco- 
nomic society like our own, in which the market is immense, 
and in which a great number of industries produce their 
goods in advance without awaiting orders, and where com- 
merce — especially speculative commerce — anticipates the 
wants of society. 

Political economy, especially classical political economy, 
teaches that production is regulated surely, rapidly, and 
automatically, by the law of supply and demand, operating 
by virtue of this principle: "Things are worth more or less 
according to the insufficiency of their quantity for the satis- 
faction of our wants." If it should happen that any branch 
of industry is not sufficiently provided with labor and capi- 
tal, the want which it is designed to satisfy is not fully met, 
and the goods which it produces acquire a higher value. 
The producer, particularly the industrial manager who is the 
principal guide of production and the first person to profit 
by a rise in prices, realizes greater gains. Attracted by the 
prospect of gains higher than the average, other producers — 



The regulation of production 139 

capitalists or laborers — engage in this favored industry. In 
this wise the production of goods is increased until the 
quantity reaches the amount desired by the public. 

When, on the other hand, any commodity has been pro- 
duced in quantities exceeding the need, its value must fall. 
This fall in value reduces the income of the producer, and 
particularly the profits of the industrial manager, who must 
directly bear the consequences. He will not continue an 
industrial policy that means loss or danger, and the produc- 
tion of this particular commodity is slackened until the 
output has fallen to the level of the amount consumed. 

In these oscillations the value of all goods tends con- 
stantly toward a fixed point, just as a pendulum in motion 
tends to a vertical position, or as water seeks a perfect level. 
This fixed point is determined by the cost of production, a 
term which designates the sum of values, in goods or in ser- 
vices, consumed in the production of a commodity, and 
which includes : the wages of labor, interest, insurance, the 
repayment of capital, the cost of transportation, taxes, and 
the price of the raw material (which is in turn made up of 
the elements just enumerated). 

When the value of an object is equal to its cost of produc- 
tion, it is in the position of equilibrium ; we say that its value 
is normal. 

The conception of the mechanism of production outlined 
in the above paragraphs is the beautifully harmonious and 
celebrated theory of the liberals, admired by Bastiat, accord- 
ing to which economic activity regulates itself automatically. 
But for the economic mechanism to operate thus admirably 
in actual practice, many conditions are necessary that are 
but rarely fulfilled. The supply must respond immediately 
to the demand, and the demand must immediately take 
advantage of the supply ; the factors of production must 
be absolutely mobile ; they must change their position with 
electrical rapidity, abandoning the employments in which 
they are superabundant, and taking up those in which 



140 PRINCIPLES OF POLITICAL ECONOMY 

they are insufficient. This theory of automatic equilibrium, 
moreover, presupposes a single market embracing the world, 
or at least markets that are closely united, like communicating 
jars of water, so that whenever the equilibrium is disturbed 
it is almost instantaneously reestablished. The economic 
world is evidently tending toward just this state of affairs; 
but it is yet far from having realized it. 

Now farming and even manufacturing — in fact all pro- 
duction — presupposes that capital is engaged in it for a 
greater or less time, 1 and that, being fixed, it is no longer 
transferable at will from one productive branch to another. 
Suppose, for instance, that a wine-raiser produces too much 
wine, and feels that he should turn his attention to the pro- 
duction of something else. We are told by the liberal econ- 
omists that the law of supply and demand (which in his 
opinion may hardly be regarded as either " harmonious " or 
" beneficial ") will oblige him to do this. But what is he 
going to do with the thousands of dollars of capital invested 
in wine-raising, and consisting of vineyards, wine cellars, etc.? 
Much of this capital lies irretrievably buried in the soil, and 
he cannot afford to abandon it. 

Supply and demand, even where they operate most freely, 
do not always bring about a distribution of products and 
services that is for the best interest of society. This is strik- 
ingly true of trades and professions. The most useful voca- 
tions — for example, farming — tend to become abandoned, 
while others that are least productive, like store-keeping and 
saloon-keeping (not to mention the government service), are 
sought with great persistency, and the number of persons 
engaged in them increases at an amazing rate. 

Is this, then, an exception to the law of supply and de- 
mand ? Certainly not. The law applies here, as elsewhere, 
but absolutely without regard for social usefulness. Indeed, 
we have already explained that value is entirely independent 
of social utility, and that it depends on human desire, which 

1 See the section on Fixed and Circulating Capital, page 127. 



THE REGULATION OF PRODUCTION 141 

is an entirely different matter. Between the scale or order 
of real wants, such as a moralist, a statesman, or a hygienist 
would draw up, and the scale of economic values, there is no 
uniformity, no parallelism whatever. 

For this reason it was thought formerly that the distribu- 
tion of trades, professions, and occupations should not be left 
to the law of supply and demand. The old industrial systems, 
based on slavery or castes or guilds, all possessed the common 
feature of regulating, by right of laws or of heredity, the 
number, duties, and rank of those engaged in various occupa- 
tions, and of subjecting them to certain restrictions. The 
predominant principle was that no one could enter any trade 
or profession without the authorization of the government or 
of the guild. 

It is well known that the French Revolution put an end, by 
law, to trade corporations or guilds, and proclaimed the prin- 
ciple of the liberty of labor, by which no one should be pre- 
vented from engaging in any trade whatever. This reform 
was welcomed throughout Europe and soon imitated by 
almost all western nations. 

The principle of free labor must be maintained because it 
is an essential part of human liberty ; it should be made to 
penetrate even those fields of activity in which it does not 
yet prevail. But it is a natural consequence that unregulated 
production should overthrow the perfect adjustment of pro- 
duction to consumption 1 and cause those disturbances of the 
economic equilibrium which are called crises. 

1 It has, nevertheless, been objected that there were more famines in those 
days than now, although the production of wheat, and trade in it, were 
hedged about by a multitude of regulations. (In some places it was even 
forbidden to substitute wine-raising for wheat-growing. ) We must acknowl- 
edge that free competition has indeed rendered great services in the produc- 
tion of wheat, because this is one of the few cases in which the theoretical 
state of free competition has in fact been nearly realized ; the wheat market 
is almost the ideal of a world market, and would even more closely approach 
this ideal if protective duties did not place obstacles in the way of free com- 
petition. 



142 PRINCIPLES OP POLITICAL ECONOMY 

III. Crises 

The automatic regulation of production just explained, 
which is founded solely on free competition, is very uncertain. 
It is subject to disturbance, — even frequent disturbance. 
Whenever the proper equilibrium is disturbed, we say that 
there is a crisis. 

Crises have often been called the diseases of the economic 
organism ; their nature is as varied as that of the innumer- 
able ailments that afflict mankind. Some are periodic, and 
others are wholly irregular. Some are short and violent, 
like attacks of fever ; others are slow, u like anaemia " — to use 
M. de Laveleye's phrase. Some are confined to a particular 
country, others are epidemic and travel round the world. 

Some economists have attempted to construct a general 
theory of crises, and to describe the laws that determine them. 1 
Such attempts must be regarded as premature. We may of 
course discover common characteristics in crises, and find 
them related to a single fundamental cause such as that 
which we have already mentioned, viz., a sudden disturbance 
of the economic equilibrium, either in the production of many 
commodities or in the production of a single very important 
commodity, such as wheat, capital, metallic money, or credit 
instruments. In each of these cases, which we now pur- 
pose to investigate, the disturbance of equilibrium is due to 

1 Stanley Jevons undertook to do this. After carefully describing crises, 
lie concluded that they took place periodically, — once every ten years. 
Since the beginning of the nineteenth century he found that there had been 
nine crises, in the years 1815, 1827, 1836, 1839, 1847, 1857, 1866, 1873, and 
1878. This recurrence is due, according to Jevons, to an analogous repetition 
of bad crops, which is in turn caused by the recurrence, every ten years, of 
spots on the sun ! In this manner the problem of crises and their periodicity 
is reduced to a problem of astronomy. 

An excellent history of the theories regarding crises is given by von Berg- 
mann, " Geschichte der nationaloekonomischen Krisentheorien," Stuttgart, 
1895. Consult also: Jones, "Economic Crises" (Macmillan, 1900); de 
Laveleye, "Le marche monetaire et ses crises"; Juglar, " Des crises com- 
merciales et de leur retour periodique," 



ECONOMIC CRISES 143 

a glut or a dearth of goods. It would seem that a dearth of 
goods is much more dangerous than a superabundance, and 
yet, as we shall see presently, the latter is more dreaded, 
except in the case of a superabundance of money. 

(1) A general glut or scarcity of products. A general 
glut is one of the most frequent forms of economic crises, 
and may even be regarded as a kind of .chronic ailment, a 
sort of constitutional infirmity, of modern industry. 1 The 
development of large-scale production, modern inventions, 
and means of transportation have enabled industry to throw 
such enormous masses of products on the market that con- 
sumption cannot always keep pace with production. This 
is not because men's wants are small or limited in number, 
— for we know that they are great and that they are even 
capable of unlimited increase, — but because the sale of an 
article does not depend solely on the number of people that 
desire it but on the number of those that have the means of 
buying it. Now the increase in income of the bulk of the 
population usually has not been so great as the growth of 
manufactures. Moreover, nearly all countries now seek to 
close their markets to foreign products, and at the same time 
try to introduce their own products into other lands. Thus 
the goods that are sent back from some places and kept out 
of others tend to accumulate as though the outlet for them 
were stopped up. Producers, therefore, in order to find an 
opening for their goods, and to have them gradually absorbed 
by consumption, are obliged to lower prices and to decrease 
the cost of production ; this general fall of prices means, 
for the employers, lower profits and failures, while for the 
laborers it means lower wages or loss of work. 

Crises caused by the inverse difficulty (scarcity of goods) 
may in certain cases be quite as formidable. We need only 

1 The collectivists attach great importance to this kind of crisis, which in 
their opinion constitutes, properly speaking, not a crisis but a necessary con- 
sequence of the present capitalistic regime, and which, being a cause as well 
as an effect, must inevitably involve the complete overthrow of our modern 
industrial organization. 



144 PRINCIPLES OF POLITICAL ECONOMY 

refer, as an example, to the so-called " cotton famine " which 
resulted from the American Civil War, and which, because 
of the lack of the necessary raw material in many European 
cotton mills, led to the discharge of large numbers of work- 
men and the ruin of many manufacturers of cotton goods. 
A bad harvest of cereals may cause terrible famines in poor 
countries like India or Algeria; even in wealthy countries, 
such as those of western Europe, a slight deficiency in the 
supply of wheat always provokes some sort of a crisis. 

It may even happen — although the event appears para- 
doxical — that the crisis due to a dearth of some one com- 
modity will produce the same results as a crisis due to an ex- 
cess in production, namely a general glut of the market and a 
depreciation of commodities. A shortage in the wheat crop, 
for instance, causes a rise in the price of wheat ; hence all 
consumers of wheat whose means are limited, that is to say 
the great majority of people, are compelled to lower their ex- 
penditures for all the other articles which they purchase. 
In this way there is a mass of goods that no longer finds pur- 
chasers, and that can be disposed of only at a loss, or must 
be kept unsold. This curious state of affairs is illustrated 
by famines in India, which generally cause a crisis for Eng- 
lish manufacturers. 

(2) A glut or a dearth in some factors of production. A 
disturbance of the proper relative quantities of the factors 
of production is still more frequent and even more grave 
than a disturbance of the equilibrium among products them- 
selves. In no productive enterprise can the factors of 
production be brought together in a haphazard, reckless 
fashion, i.e. without due regard for their proportion to each 
other. The chemical law of so-called " definite propor- 
tions" reigns in this field quite as fully as in chemistry; 
M. Walras and M. Pareto call it the " law of the co- 
efficients of production." Successful production always 
requires a certain amount of land, a proportionate amount 
of labor, and a proportionate quantity of fixed and of 



ECONOMIC CRISES 145 

circulating capital. These productive elements, it is true, 
may to some extent be substituted for each other ; but not 
ad libitum. Often there is too much or too little of one of 
these elements, — not enough labor or capital for the land 
at our disposal, or, inversely, not enough land to keep busy 
all the laborers or to use all the capital, or, perhaps, more 
capital than is required by the number of laborers employed, 
or vice versa. 

The amount of land in a country is limited by nature ; to 
increase it is beyond the power of man. The number of 
laborers depends on the laws (only imperfectly understood) 
of population, and hence may also be said to have certain 
limits. But the quantity of capital does not seem to have 
any limit at all. In an old country, where saving is an es- 
tablished habit and in which savings are accumulated with 
increasing rapidity, where the land has been carefully tilled 
for centuries and therefore offers little inducement for the 
investment of additional capital, capital must ultimately be 
accumulated in huge quantities. Naturally this abundance 
causes a fall in the rate of interest, 1 and men look about 
for more profitable investments; new enterprises are be- 
gun, either abroad or at home, some of them of an extraor- 

1 There is, however, a difference between commodities and capital ; al- 
though the glut of commodities lowers prices and ruins producers, a glut 
in capital, on the other hand, raises the value of capital and momentarily 
enriches the capitalists. This result, which at first seems singular, is not 
difficult to explain. The fall in the rate of interest changes the basis of capi- 
talization for the future, but the capital already invested profits necessarily 
by this circumstance. 

An example will make this clearer. Suppose that to-day the rate of inter- 
est is 5 per cent. Stock which yields an annual income of $10 is therefore 
worth $200. Suppose that to-morrow, by reason of a glut in capital, the rate 
of interest for new investments falls to 3 per cent. Then the stock which 
brought an annual income of $10, and which continues to bring that amount, 
is worth $333, since 3 per cent of $333 is $10. 

The result of this strange circumstance is that although merchants com- 
plain of a glut in commodities, capitalists rejoice in a glut of capital. The 
fortunate position of capitalists who have already invested at the old rate 
cannot, however, continue forever ; either some crisis will lower the value 



146 PRINCIPLES OF POLITICAL ECONOMY 

dinary nature, and some altogether absurd, until finally there 
comes what in stock-exchange language is called a " crash." 
Many of these industrial collapses are sadly prominent in 
the economic history of recent years, especially those of 1819, 
1837, 1873, and 1893 in this country, and those of Vienna 
in 1873 and Paris in 1882. 

The opposite state of affairs is also possible, namely in- 
sufficiency of capital, which may follow such crashes as 
those we have just mentioned, or which result from the use 
of vast amounts of capital in a costly war. When capital is 
insufficient, there is a crisis, but one marked by conditions 
opposite to those set forth above, namely by a rise in the 
rate of interest and of discount, and difficulty in obtaining 
money. 

Finally, there may be a disturbance of the normal pro- 
portion between fixed and circulating capital, the amount of 
circulating capital being relatively insufficient. This has 
happened in countries which, having imprudently devoted 
all their savings to the construction of railroads, have noth- 
ing to spend in developing their industries and consequently 
no traffic for the very railways they have constructed. 

(3) Excess or scarcity of money. Although money is 
only a product like every other product, yet it plays so im- 
portant an economic part, a role so peculiar, that every dis- 
turbance of equilibrium in the normal amount of this product 
must cause a slackening of the whole economic mechanism. 

An excess of money, like an excess of any other product, 
may also cause a crisis. The public, to be sure, will never 
consent to regard as dangerous the existence of too much 
money, or conceive that it may cause a crisis. But it cannot 
be denied that there is a certain proportion between the 
amount of money that ought to be in circulation in a coun- 

of their investment, or the changed rate of interest will be sooner or later 
applied to their investments also — when the time comes for returning the 
borrowed capital. ^.Ultimately, the abundance of capital must necessarily 
reduce the power of capitalists. 



OVERPRODUCTION 147 

try, and the needs of that country ; if the amount is sud- 
denly increased, a crisis results. The crisis takes the form 
of a general rise of prices, and has very serious consequences 
for all consumers, particularly for creditors and persons 
living on fixed incomes. 

It may be said, of course, that when we have to do Avith 
metallic money, especially with gold, it is easy for a country 
to dispose of its excess, and that it is in the very nature of 
things for the excess to vanish. But this is not true when 
the money is paper money or even bank notes. (See, below, 
the section on Paper Money.) 

A diminution in the quantity of money is regarded by 
every one as a danger, and always occasions great alarm. 
This alarm is, no doubt, partly due to certain preconceived 
false notions regarding the part played by money ; yet it is 
not entirely unfounded. 1 When the balance of trade has 
long been unfavorable to a country, and its reserve of coin 
is not large, a time comes when it no longer has enough 
money. Then the cash reserves in the banks diminish, 
exchange becomes unfavorable, the rate of discount is raised, 
and many merchants, unable to meet their engagements, be- 
come bankrupt. Such conditions as this are called monetary 
crises. They are the most dangerous of all, for they seem 
to possess a thoroughly epidemic character ; but they have 
also been most carefully studied, and their arrival can be 
most readily foreseen and therefore most successfully fore- 
stalled. (See the section on Rises in the Rate of Discount.) 

IV. Overproduction and the Law of Markets 

The fear of an excess in production, of a general glut, is a 
nightmare that haunts the minds of all business men. The 
feeling is not hard to understand. Every producer, observ- 

1 M. de Laveleye regards this as the sole fundamental cause of crises. 
Many economists thought that the last European crisis, i.e. the depression 
of prices during fifteen years, was due to the scarcity of gold. This question 
is discussed by Hector Denis, " La depression des prix." 



148 PRINCIPLES OF POLITICAL ECONOMY 

ing that his goods sell the better the scarcer they are in the 
market, naturally concludes that scarcity is a good and 
abundance an evil. 

The economists of the classical or optimistic school do not 
like to admit the possibility of any discord in the economic 
harmony which they never tire of explaining and glori- 
fying. They are unwilling to acknowledge that crises are 
consequences of economic liberty. They have long tried to 
prove that the steady increase of products is advantageous 
not only for the consumers — for that goes without saying — 
but also for the producers themselves. Of course they do 
not undertake to prove that there cannot be an excess of 
production in a particular industry, nor that such an excess is 
anything but a misfortune. But they maintain that, when 
there is a glut in any branch of production, the best remedy 
consists in a proportionate increase in the production of 
other goods. The crisis resulting from abundance can, they 
claim, only be cured by abundance itself, according to the 
celebrated motto of the homeopaths — similia similibus. 
Hence all producers are interested in making production as 
abundant and as varied as possible. This theory, known as 
the law of markets (la loi des debouches*), was first promul- 
gated by Jean Baptiste Say, who was very proud of it and 
who asserted that it would change the policy of all nations. 
It may be summarized as follows : Every commodity will 
find a sale more readily with every increase in the variety 
and abundance of other commodities. 

To understand this theory, let us leave money out of 
consideration, and suppose that products are exchanged 
directly for products, as under the system of barter. Take 
a trader arriving at one of the great markets of Central 
Africa. Is it not advantageous for him to find the market 
fully supplied with numerous commodities ? Of course he 
does not care to find the market fully supplied with the 
particular commodity that he has to offer, say muskets, but 
he does want to find the greatest possible quantity of all 



OVERPRODUCTION 149 

other goods, — ivory, gum, gold-dust, etc. Every new com- 
modity that is put on the market means a greater possibility 
of disposing of his own commodity, or, as this theory puts 
it, an additional market for his goods. The more other goods 
there are for which he can exchange his goods, the better are 
his chances of disposing of them. And if our trader has 
unfortunately brought too many muskets, he hopes that 
others have also brought too much of their goods to the 
market ; in this case muskets are no longer in excess, as 
compared with other goods ; and as J. B. Say remarks, 
" What best favors the sale of one commodity is the produc- 
tion of another." 

The same thing, we are told, takes place under the system 
of exchange by means of money. The greater the resources of 
all other persons, the better is the opportunity that each of 
us has of disposing of his goods or his services ; and the 
quantity of my resources depends on the amount I have 
produced. The best we can wish for a person who has pro- 
duced a commodity in excess, is that all other producers have 
done the same ; the abundance of one commodity is counter- 
balanced by that of other commodities. If, for example, Eng- 
land has produced too much cotton goods, and India has 
simultaneously produced too much wheat, there is no danger 
that England will be unable to dispose of her cottons. 

Again, let us suppose (a supposition which coincides with 
present conditions) that industry, thanks to the marvellous 
increase of productive power, throws an enormous quan- 
tity of manufactured goods on the market. The result is a 
general glut. Why ? Because agricultural production has 
not kept pace with manufacturing ; it has increased only 
slightly, and consequently the value of agricultural goods 
has, compared with the value of manufactured goods, in- 
creased. In this case the consumers, who are obliged to 
spend more for their food-stuffs, are unable to purchase 
many manufactured goods. But if agricultural production 
progresses as rapidly as manufacturing, the equilibrium is 



150 PRINCIPLES OF POLITICAL ECONOMY 

again established ; the consumer, spending less for his food, 
will readily purchase the excess of manufactured goods. 

Notwithstanding these circumstances, and even supposing 
that all products without exception increase in quantity, 
there may still be a fall in prices and consequently a general 
glut. For. our hypothesis, as above stated, did not include 
an increase in the amount of money. Therefore the value- 
relation between money and commodities in general has 
changed. Since money is scarce, prices fall. But if we 
could increase money in the same proportion as other com- 
modities, the evil would be removed, for then the relation 
of values -— called price — would not have changed, and the 
crisis would not take place. We may, therefore, declare 
that even this hypothesis confirms the economic law of 
markets. To sum up, then, we may say that the theory of 
markets simply shows that there is no danger in an excess 
of production whenever the increase takes place simultaneously 
and proportionately in all branches of production. It is 
perfectly evident that in this case the relations between 
the quantities exchanged are exactly the same as before, 
although the total quantities have increased. 

Unfortunately, the increase of production never takes 
place under the conditions required by the theory of mar- 
kets. There is not one chance in a million that an equal 
increase will ever occur simultaneously in all branches of pro- 
duction. Production increases by sudden leaps and by local, 
intermittent changes. Besides, before we can make any 
practical use of the law of markets, nations must tear down 
the walls of protective duties which prevent an excess of 
commodities in one country from pouring out into other coun- 
tries and thus establishing a level in the universal market. 

This is why these disturbances of equilibrium in exchange, 
these crises which we have analyzed, remain an inherent evil 
of our economic organization. 1 This is also why producers 

1 The collectivist school of socialists regards overproduction as an inevita- 
ble consequence of the exploitation of laborers. The working-classes, they 



FREE COMPETITION 151 

nowadays seek to regulate production by means of commer- 
cial agreements known as trusts and pools, — perhaps the 
most interesting economic phenomena of to-day. Some- 
times, it is true, these combinations undertake to limit the 
quantity of a commodity on the market in order simply 
to raise its price quickly. In this event they are speculative 
schemes, very much like that which, under the guild system, 
was called " engrossing " ; to " engross " meant to buy up 
the entire supply, or so much of it as not to allow other 
persons to get what they needed. Generally, the members 
of these modern combinations agree not to produce beyond 
a certain limit ; in this case their influence may be benefi- 
cial. (See the section on Large-scale Production.) 

V. Competition 

The law of supply and demand, to be true in practice, 
requires freedom of labor ; and freedom of labor in its active 
form is called free competition. Competition, then, appears 
to be the great regulator of the whole economic mechanism 
of modern society. It was formerly customary in most 
treatises on political economy to enumerate the advantages 
of free competition and the disadvantages of monopoly. It 
was generally agreed to attribute to competition the follow- 
ing good results : — 

(1) It adapts production to consumption, and thus main- 
tains the economic equilibrium. 

(2) It gives a great impetus to production, stimulating 
progress by means of rivalry, and effecting in the economic 

declare, are robbed by the capitalists of about half the product of their toil, 
and, therefore, with the wages they receive, are unable to buy back the 
product of their labor. Hence the glut. If the workers received what is 
due them, and their powers of consumption were thus made equal to their 
powers of production, there could be no more crises. 

This explanation does not seem quite satisfactory. Even granting the fact 
of spoliation, such spoliation would mean that the power to consume has 
simply been transferred from one class to another ; and it is difficult to see 
why the spoliators should not consume as much as the despoiled. 



152 PRINCIPLES OF POLITICAL ECONOMY 

domain a kind of natural selection like that prevailing in the 
organic world. 

(3) It causes a gradual lowering of prices and tends to 
cheapen goods in the interest of all persons, — particularly 
that of the poorer classes. 

(4) It effects a progressive equalization of economic conditions 
by reducing profits and wages to nearly the same level in all 
industries. 

Economists of the optimistic school, such as Bastiat, 
delight in singing the praises of the "harmonies" evolved 
by free competition, which they regard as no less marvellous 
than the harmony Pythagoras believed he heard descending 
from the skies. They regard the economic order based on 
free competition as " spontaneous " or " natural," and con- 
clude that it is both perfect and permanent in character. 

This enthusiasm has been considerably dampened in re- 
cent years. A more attentive observation of facts and of 
the actual effects of free competition has not justified the 
blind faith in it. We have learned that the present eco- 
nomic organization is no more and no less natural and spon- 
taneous than any preceding economic system, such as the 
family economy, the caste system, or the guild system ; for 
these forms too were the natural result of historical evolu- 
tion. And as for the beneficent effects of competition, it 
must be confessed that they too are somewhat questionable, 
in view of certain facts that stare us in the face : — 

(1) Free competition does not regularly assure the equi- 
librium between production and consumption ; there are 
even times when it threatens to disturb this equilibrium. 
(Consult the preceding section on Overproduction.) 

(2) Although free competition generally stimulates pro- 
duction by keeping up a rivalry among producers, it is in 
other respects (for example, with regard to the quality of 
goods) harmful to production. Each competitor, in order 
to triumph over his rivals, endeavors to substitute cheap 
materials for better and more costly ones, so that as far as 



FREE COMPETITION 153 

progress in production is concerned the most striking result 
of keen competition is, perhaps, the adulteration of goods. 
Adulteration has now become a veritable art that takes full 
and immediate advantage of all scientific discoveries. 1 

The monopolist, on the other hand, generally finds it to 
his advantage to sustain the superior quality of his products; 
he even takes pride in keeping his goods up to a high stand- 
ard, in order to increase the reputation of his firm. 

(3) Free competition does not always guarantee cheapness, 
and in many cases may even cause high prices. It is true that 
competition, wherever it operates thoroughly, tends to bring 
the value of all goods down to the cost of production. But 
there are many instances in which it raises the cost of produc- 
tion, and consequently the price of the product. This para- 
doxical result is attained whenever there is too large a 
number of producers in any branch of industry. The case 
of bakeries offers a striking example. The number of 
baker-shops is ridiculously excessive. As each of them 
sells less and less, because of the competition among a large 
and increasing number of shops, each is obliged, in order to 
cover expenses, to charge more for each article sold. A 
newly arriving competitor cannot lower prices, as they are 
just high enough to permit the old producers to gain a 
livelihood ; his entrance, on the contrary, will raise prices, 
since still another producer must be supported by the same 
quantity of sales. 2 

1 Instances of this state of affairs are innumerable. "Wine can now be 
made without grapes, jam and preserves without fruit and without sugar, 
butter without milk, and eggs without hens. At Lyons, France, silk goods 
are made that contain only 5 per cent of silk and 95 per cent of mineral 
substances. 

If competition, or, in general, the struggle for life, guaranteed the triumph 
of the most moral, the most devoted, and the most unselfish persons, then 
it would truly be a means of progress and real selection. But in reality it 
only assures the victory of the strongest and most cunning, and thus may 
entail a veritable moral retrogression, for men are obliged, as the proverb 
says, to "howl with the wolves." 

2 Formerly, the number of bakers was regulated in each city according to 



154 PRINCIPLES OF POLITICAL ECONOMY 

On the other hand, the system of monopoly does not mean 
the arbitrary rule of the monopolist. Prices are, under this 
system, no more arbitrary than under that of free competi- 
tion ; for in both cases prices are subject to the general law 
of values, the price of an object always being limited by the 
desire of consumers for that object and the sacrifices they 
are ready to make to procure it. Without entering into the 
difficult question of the determination of prices under a 
system of monopoly, we may remark that every monopolist 
finds it to his interest to keep prices reasonably low, on the 
principle of "small profits and large sales." 1 

(4) Free competition does not necessarily cause an equali- 
zation of profits and of wealth ; for competition is essentially 
a kind of warfare which means the triumph of the strong and 
the ruin of the weak. Can it be said that political wars have 
resulted in equalizing the political power of nations, or that 
vital competition — known as the " struggle for life " ■ — 
among plants and animals has developed all of them to the 
same degree ? Similarly, those countries in which industrial 
competition is most free and most vigorous, e.g. the United 
States, are those in which the most colossal fortunes are found. 

population, and bread was relatively less dear than to-day. In Paris thirty 
years ago there was one baker to every 1800 inhabitants ; to-day there is one 
for every 1300, and if we count the branch stores, one for every 800. In 
order to earn a living they must make a profit of one cent per pound of 
bread ; this is the amount indicated by the official price lists. The great 
cooperative bakeries can cover their expenses with one-fourth this gain. 

No one has denounced the evil effects of free competition, or the paradoxi- 
cal result that it has in raising prices, with more animation than Fourier. 
But even John Stuart Mill, whose energetic statement in favor of free com- 
petition we have quoted, also recognized (in a declaration made before a 
commission of the House of Commons, June 6, 1850) that the middlemen 
obtain an extravagant part of the total produce of social labor, and that 
" competition has no other effect than to share the sum total among a larger 
number and thus diminish the portion of each, rather than to lower the 
relative part obtained by this class in general. 1 ' 

1 The formation of trusts in this country has in some cases raised prices ; 
but in the best-managed monopolies, prices are probably no higher than they 
would be under competition. See Jenks, " The Trust Problem," pp. 130-170. 



FREE COMPETITION 155 

(5) Lastly, the most unexpected result of free competition 
is that it is not a permanent state, as experience shows that 
it tends to destroy itself by giving rise to monopolies ! Be- 
cause of the gradual elimination of smaller enterprises and 
the triumph of the large ones, competition tends to cause the 
formation of giant enterprises that seek to suppress, and that 
actually succeed in suppressing, all competition. The great 
capitalistic leaders in each branch of production endeavor to 
form gigantic combinations, of national or even international 
importance, called "trusts" in this country and "Kartellen" 
in Germany. These combinations despotically control an 
entire branch of production, at least for a time, and become, 
so to speak, states within the state. They arouse the distrust 
of governments, which consequently intervene by means of 
regulatory laws or taxes, and which, in some cases, take 
charge of these enterprises themselves and thus transform 
private monopolies into public ones. 

The economic evolution which is taking place at the 
present time appears to involve these three successive 
stages : (a) competition among small producers ; (5) the 
monopoly control of large producers ; (c) regulation by law. 
This development, which would lead straight to collectivism, 
or at least to state socialism, is fortunately not inevitable. 
We can very well conceive, and we are already beginning to 
realize, a system in which mutual agreement — between 
workmen and employers through the medium of organizations 
of both, and between producers and consumers by means of 
cooperative associations — will do away with most of the evils 
of competition without placing free enterprise under the yoke 
of governmental regulation. 1 

1 Aside from economic arguments there are also moral and philosophical 
considerations which lead us to the belief that cooperation is destined more 
and more to take the place of competition. Even in biology there is a new 
school that inclines to the belief that association may be a cause of progress 
and improvement of the species quite as powerful as the competition empha- 
sized by Darwin and Spencer. Consult Geddes, " The Evolution of Sex." 



CHAPTER II — ASSOCIATION 
I. The Successive Forms of Association 

" To-day, Good Friday," wrote Fourier in 1818, " I have 
discovered the secret of universal association." This was a 
boast, for Fourier, although he set forth the principle of 
association with remarkable vigor, certainly did not discover 
it. Association is not the kind of phenomenon that requires 
discovery ; it is perfectly patent to everybody. It is prob- 
ably the most general of all the laws that govern the universe, 
since it is manifested not only in the relations among men 
living in society, but also in those that govern the planets of 
the solar system, those that unite the molecules of inorganic 
matter and the cells of organisms, as well as those that rule 
human thought. Even the lower animals are familiar with 
the laws of association, and some animal " societies," — those 
of the bees, ants, and beavers, — have long been an inex- 
haustible topic of study and admiration. 

Association is absolutely necessary for every enterprise 
that is too great for a single person, even though it be the 
mere lifting of a weight. The word association to-day 
almost inevitably suggests the thought of voluntary grouping. 
But this is a mistake. Association among men was first 
the result of instinct (as among animals), then of coercion, 
and only recently, at least in the economic domain, has it 
become the result of contract. Even now it is not entirely 
contractual. 

The most natural and probably the very first form of 
association was the union of sexes and the family which 
resulted from it. It may be objected that this association 
has no economic character. That would be an error, for it 

156 



THE FORMS OF ASSOCIATION 157 

appears that marriage, or rather the household, was at the 
outset an association of distinctively economic character. 
If we should ask an American Indian why he gets married, 
he would reply, " Because our wives go after wood, water, 
and food, and carry all our baggage." It is even very prob- 
able that the economic aspect of marriage gave it the perma- 
nent character which sexual instinct or even parental instinct 
would have been powerless to impart. The clan, and all 
forms of primitive political and economic association the 
origin of which is still clouded in mystery, probably origi- 
nated in some kind of blood-relationship. 

Association next became coercitive, in the form of slavery. 
We have already said that slavery must be considered simply 
as a widening of the primitive family, due to economic 
causes, chief among which was probably the need of a more 
powerful association. At a time when wives were won by 
conquest and capture (as in the traditional rape of the 
Sabines), there is nothing surprising in the fact that conquest 
should serve also to annex alien workers to the family. Or- 
dinarily, captured members of foreign tribes finally became 
adopted members of the family, as one may readily observe 
in the Greek tragedies of 2500 years ago, or in the accounts 
of travellers who have visited modern Morocco. 

It was by means of this enforced cooperation that the 
ancients were enabled to erect the Cyclopean walls and the 
Egyptian pyramids, and to propel galleys having three or 
four banks of oars. 

Association gradually became semi-coercive even among 
savages. During the Middle Ages it adopted innumerable 
and complex forms, which we cannot pause to describe now. 
Finally, it was transformed into association under the leader- 
ship of employers. In all modern societies, production is car- 
ried on by private enterprises, using this term in its technical 
sense to signify groups of persons in which one individual 
— the employer — furnishes capital, tools, and land, while 
the others — who are hired for wages — provide the labor. 



158 PRINCIPLES OF POLITICAL ECONOMY 

Is this form the last, is contractual association the termi- 
nating-point of social evolution, and, aside from some minor 
details which perhaps require improvement, the permanent 
form of productive organization ? Such is, indeed, the opin- 
ion of the classical school. But we must deny that the pres- 
ent form of association is founded on free contract. The 
laborers who work in the factory are, to be sure, free men, — 
free to come and to go at their own choice ; yet it is true that 
we have here only an imperfect form of free association, and 
the most conclusive proof of this lies in the fact that neither 
in law nor in everyday speech do we use the word " asso- 
ciation " when speaking of the union of employers and 
employees. Perhaps our application of the term to this 
relation has already surprised the reader. The union of 
employer and employees is, however, an association in fact, 
but not in lazv ; it is an association in production, but not in 
distribution. The workers have no feeling whatever of being 
" associated " with the employer in a common undertaking. 
This is, as we shall see, precisely the gravest defect of the 
wage system. (See the section on the Wage System.) 

But legislation now tends to give the wage system the 
character of a real contract, — when, for example, it calls upon 
the workmen to participate in the preparation of " workshop 
regulations," or when it awards damages for breaking the 
contract of hire. Employers and workers also tend toward 
this conception by founding organizations and institutions 
that we shall describe further on. (See Book V.) We there- 
fore have the right and the duty to hope that association 
under the leadership of employers will in turn give way to 
more thorough and complete association, i.e. free and real 
association, that shall include distribution as well as produc- 
tion, and in which each party shall have not only a clear con- 
sciousness that he is a member of a collective undertaking, 
but also the firm resolution to work in harmony with the 
other members. It is for this reason that the concerns in 
which true or contractual association is practised between 



THE ASSOCIATION OF CAPITAL 159 

capital and labor — although thus far they occupy only a 
microscopically small place in our economic system — should 
be regarded as representing the superior phase toward which 
social evolution is moving. 

II. The Association of Capital 

From what we have said, it follows that the truly free asso- 
ciation of laborers has scarcely yet been tried. The same 
statement cannot be made with regard to the association of 
capital. When businesses are conducted on a large scale, 
— and we shall see in the next section that such is the present 
tendency, — one man cannot usually furnish all the capital 
that is required, or even the capital that is needed to em- 
ploy the requisite number of laborers. For this reason sev- 
eral capitalists unite in order to furnish the necessary capital, 
and the enterprise is launched in the form of a so-called 
" stock company," — a new form of business that is rapidly 
gaining ground in commerce and industry. 1 

A stock company offers great advantages, precisely be- 
cause it is exclusively an association of capital. Of the three 
instruments of production, — land, labor, and capital, — the 
last most readily admits of association, because it possesses 
certain characteristics to a far greater degree than either land 
or labor, namely divisibility and the facility ivith wliich it is 
moved from one place to another. 

There is no natural limit to the divisibility of capital ; 
hence each capitalist may restrict his share in a business 
enterprise and limit his risks as best suits him. This feature 
explains the success of stock companies. When each share 
costs only $100 (or in some associations only $5), each person 

1 The important and predominating position of the corporation in Ameri- 
can manufactures at the present time is revealed by the census statistics for 
manufactures. While only 40,743 of the 512,254 establishments reporting in 
1900 were organized into corporations, they nevertheless produced $7,733,- 
582,531, or 59.5 per cent of the total gross value of products. These organiza- 
tions comprise nearly all the great manufacturing enterprises of the country. 



160 PRINCIPLES OF POLITICAL ECONOMY 

may buy exactly according to his wealth or his degree of 
confidence in the enterprise. 1 

Moreover, the marvellous facility with which capital is 
transported is increased every day by the development of 
credit institutions and devices. Laborers, as well as land- 
owners, in their efforts to cooperate productively, are obliged 
to choose a certain locality, and can bring together only those 
persons that live in a particular part of the country. Labor 
is not easily moved from one place to another ; land cannot 
be moved at all. But capital has wings, so to speak, and can 
fly from the most distant parts of the earth to such places as 
offer the most profitable investment. 

But, on the other hand, this form of association involves 
such grave disadvantages that we can hardly agree with 
those economists who regard it as the coming form of busi- 
ness enterprise. The very fact that it associates only capital 
and not persons is a sign of inferiority. The associates, 
called stock-holders, do not know each other, and often have 
no further knowledge of the enterprise than that given in 
the share certificates stored in their safes. 2 A stock company 
consists of two groups of persons : on the one hand those 
who share the profits of an enterprise in which they do not 
work, and on the other hand those who work in an enter- 

1 Industrial associations offer the capitalist the choice of receiving a fixed 
income or of sharing the risks of an enterprise ; they offer him either bonds 
giving the right to the regular receipt of a fixed sum, or stock that represents 
shares of property and confers the right to a proportionate share in the 
risks and profits of the business. 

The divisibility of capital furthermore permits capitalists to undertake co- 
lossal and very hazardous enterprises that otherwise would be impossible. 
No capitalist, however wealthy he may be, dares to provide the millions nec- 
essary for building an Isthmian Canal. The risk is too great. But there are 
many capitalists who are each willing to incur a small part of the risk ; and 
when the risk is thus distributed, the failure of the project can entail the ruin 
of only those few who have risked large amounts. 

2 Many capitalists who try hard to get hold of the mining stock of Witt- 
watersrand, Klondike, or Sosnowice, would be embarrassed to locate these 
places on the map. Assuredly, the bond of association which unites them 
to the men that work in these mines is of a rather fictitious nature. 






LARGE-SCALE PRODUCTION 161 

prise the profits of which they do not share. This situation 
is hardly compatible with our idea of justice, and, even from 
the economic point of view, involves a singularly unstable 
state of affairs. (See Book V, on Distribution.) 

III. Large-scale Production 

The organization of production under the control of em- 
ployers, and particularly by means of the association of capi- 
tal, is both the evidence and the indispensable condition 
of the most characteristic change of modern times, viz., the 
passage from production on a small scale to production on a 
large scale. 1 

In the closing years of the nineteenth century this kind of 
organization has taken such enormous dimensions as to 
attract public attention and arouse public anxiety. Manu- 
facturing syndicates tend to obtain control of an entire 
branch of industry in a country and even in the whole world. 
In the United States, where they have developed most re- 
markably, they are generally called trusts, and the same 
name has been adopted elsewhere. We hear of them con- 
stantly. Scarcely a day passes but the newspapers announce 
the formation of a new one. There is the oil trust (re- 
garded as the first), the coal trust, the steel trust (with a 
capital supposed to reach $1,500,000,000), the coal trust, the 
tobacco trust, the whiskey trust, the writing-paper trust, the 
copper trust, and very many more. 2 Even governments 
have been alarmed at their power and increase, and have 

1 The Baldwin Locomotive Works, of Philadelphia, employ 13,500 per- 
sons, and build from 30 to 35 locomotives per week, or one locomotive every 
four hours. The Krupp steel works at Essen employ over 20,000 workers. 
The United States Steel Corporation has 158,000 employees, according to 
Professor H. L. Nelson, in his article on "The So-called Steel Trust," in 
the Century Magazine for December, 1902. There are hundreds of enter- 
prises, — factories, railroads, electric traction companies, etc., — each of 
which employs several thousand workers. Some of our railroads have over 
30,000 employees. 

2 In France there has been created even a "Bible trust, 1 ' the principal 



162 PRINCIPLES OF POLITICAL ECONOMY 

adopted legislative measures to curb them, — measures 
which generally have proved ineffective. 

Yet the trusts have found defenders. Many persons re- 
gard them as the preliminary steps toward a new industrial 
regime which will jDut an end to present ill-regulated pro- 
duction, by establishing a proper equilibrium between pro- 
duction and consumption ; this will result, they maintain, not 
so much in the rise of prices as in assuring the regularity of 
profits and wages. At all events, trusts seem to be success- 
ful in preventing those crises of overproduction to which 
we have referred. 1 

book dealers having formed a syndicate to raise the price of Holy Scripture 
15 per cent. 

In a list of trusts and combinations in this country, given by Byron W. 
Holt in the Beview of Beviews for June, 1899, there are about one hundred 
and twenty corporations of this kind, each having a capital of ten millions or 
more. About one-half of these were formed in 1899. 

The Journal of Commerce, in its year-book for 1899, published a list of 
353 trusts and' combinations existing in March of that year, with an average 
capitalization of $17,000,000 and a total capitalization of $5,832,882,842. 

Moody's Manual of Corporation Securities for 1902, an accepted author- 
ity in financial circles, gives a list of consolidations or trusts, with a capital 
of $10,000,000 and over, which have been formed since January 1, 1899. 
This list contains 82 companies, with a total capital of $4,318,005,646. The 
same authority may be quoted to the effect that " a complete list, without 
regard to date of formation and including both large and small, would prob- 
ably aggregate 850 going combinations, and would easily foot up over 
$9,000,000,000 of capitalization. Including railroad consolidations, such a 
list would make a total of over $15,000,000,000 outstanding capitalization." 

1 A trust, as popularly understood, is a consolidation, combine, pool, or 
agreement of two or more naturally competing concerns, with the purpose of 
fixing prices or rates in any industry or group of industries. Generally, the 
trust endeavors to regulate the price and the quantity of the output. The 
customary form now is that of corporate consolidation, in which competing 
producers give up their autonomy and transfer the ownership of their plants 
in exchange for shares of stock in the consolidation. 

Trust literature, which is quite extensive, includes a number of inter- 
esting books, among which mention should be made of the following : W. M. 
Collier, " The Trusts," New York, 1900 ; von Halle, "Trusts or Industrial 
Combinations in the United States," New York, 1895; Jeans, "Trusts, 
Pools, and Corners," London, 1894; Jenks, "The Trust Problem," New 
York, 1900; George Gunton, "Trusts and the Public," New York, 1899; 



LARGE-SCALE PRODUCTION 163 

Now the evolution which is taking place round about us 
is not merely the result of a kind of fatality ; it is due to 
the fact that it offers, from the viewpoint of production, 
certain incontestable advantages. What are these advan- 
tages ? First of all, only large-scale production permits of 
certain undertakings which, because either of their size or of 
the time they require, far exceed the power and the lifetime 
of an individual. 

Even in those enterprises, moreover, which would not 
actually overtax the capacity of an individual, collective 
production possesses a marked superiority. By grouping 
all the factors of production, — manual labor, capital, natural 
agents, and situation, — it economizes them ; that is to say, 
the same amount of wealth is produced at a less cost, or, 
what amounts to the same thing, more wealth is produced 
at the same cost. The various economies of large-scale pro- 
duction are entitled to separate consideration : — 

(1) Economy of labor. This advantage is due above all 
to the possibility of introducing a more perfect division of 
labor, as we shall see presently. But it is also a result of 
simply bringing the laborers together. In small-scale pro- 
duction much time is lost, and some of the workers are 
obliged to be frequently unoccupied. Take for instance a 
hundred business houses, each of which employs ten men, 
and merge them into one large establishment. It is evident 
that in order to do the same amount of work as was done 
before, it will not be necessary to retain all the employees. 
There will be no need for a hundred cashiers or a hundred 
bookkeepers. As each employee will now be able to work 
continuously, he will be able to do two or three times as 

and especially the Eeport of the United States Industrial Commission, 
Volumes 2, 13, and 18. 

Interesting descriptive articles on the principal American trusts are pub- 
lished in the Century Magazine, beginning with the number for November, 
1902. An illustrated history of the Standard Oil Company, by Ida M. Tar- 
bell, was begun in the November number, 1902, of McGlure^s Magazine, and 
continued through several subsequent numbers. 



164 PRINCIPLES OF POLITICAL ECONOMY 

much work, and consequently will take the place of two or 
three men working under the old system. 

(2) Economy of place. To obtain a hundred times more 
room in a store or factory, it is not necessary to have a piece 
of ground a hundred times as large, nor to purchase a hun- 
dred times the amount of building material. Simple mathe- 
matics shows that when the volumes of two cubes are as 1 to 
1000, their surfaces are as 1 to 100 ; and it is the surface 
that costs most. Everyday experience, moreover, demon- 
strates that the cost of a building or the rent of a store does 
not increase in direct proportion to the surface occupied. 
The smallest stores on the business streets of our large cities 
pay a comparatively high rental ; but the large " department 
stores," many of which transact a hundred times as much 
business as the average small store, certainly do not pay a 
hundred times as much rent. 1 

(3) Economy in natural agents. A powerful steam-engine 
consumes, relatively speaking, far less coal than a weak one. 2 
Electric lighting is more economical than gas illumination 
when used for a large area, but it is exceedingly dear when 
used on a small scale. 

(4) Economy of capital. Take a large store transacting a 
hundred times the business done by a small one. It does 

1 The greatest department store in Paris evaluates its rental at $200,000 a 
year, and transacts business to the amount of $30,000,000. Stores that 
transact business to the amount of $30,000 a year certainly pay more than 
a proportionate sum — $200 — annually for rent. 

The business of several American department stores amounts annually to 
from $7,500,000 to $15,000,000. The mail-order business of one great store 
amounts to $900,000 a year. On the busiest days fully one hundred thousand 
persons visit each of the largest stores in New York, Philadelphia, Chicago, 
and Brooklyn. One firm spends more than $300,000 a year for advertising. 
Single departments in several stores sell more than $2,000,000 worth of goods 
annually. Consult the interesting article by S. H. Adams on " The Depart- 
ment Store " in Scribner' l s Magazine for January, 1897. 

2 M. Achard, in an article in the Revue d" 1 economie politique for Sep- 
tember, 1890, calculates that one horse-power will cost eight cents when pro- 
duced by a five horse-power engine, five and one-half cents when produced 
by a ten horse-power engine, two cents when a fifty horse-power machine is 



LARGE-SCALE PRODUCTION 165 

not need to keep on hand a hundred times the goods kept 
in stock by the small store ; probably ten times the amount 
is sufficient, except that it must be renewed ten times as 
often as in the small store. The large store, therefore, can 
do a hundred times as much business with only ten times 
as much capital. The consumer, moreover, is better satisfied, 
for in consequence of this frequent renewal of stock, the 
goods are newer and more fashionable. 

Again, merchants or manufacturers who buy on a large 
scale can secure better bargains ; they obtain greater dis- 
counts and are better able to pay in cash, or, at least, do not 
require long credits before they can pay bills. 1 Hence the 
large stores or manufacturers that buy in large quantities 
make more effective use of their capital. 2 

used, and only one cent when produced by engines of above one hundred 
horse-power capacity. 

1 Small stores, which require considerable time to dispose of their stock, 
necessarily have a much larger share of their capital " tied up." A typical 
example of the disadvantage of the small store is offered by the sale of cheap 
non-copyrighted books ; the small store can afford to buy them only in small 
quantities of a few hundred at a time, whereas the larger establishments, 
purchasing entire editions of ten or twenty thousand, can often sell them at a 
lower price per volume than that paid by the small dealer himself. 

The capital stock of the greatest Paris department store is but $4,000,000, 
and the annual dividend averages $1,500,000, that is, about 40 per cent 
on the capital, and about 5 per cent on the total sales. It is no infrequent 
occurrence for the entire stock of a department to be sold out and replen- 
ished twelve times in a year. 

Concerning the better paying facilities of great businesses, a man who 
conducted one of them is quoted to the effect that "the profits of the de- 
partment store are represented by the cash discounts on its bills." 

An interesting series of articles describing the most typical of American 
great businesses is given in Scrib-ner's Magazine for 1897. 

2 Besides the advantages of large-scale production here enumerated, 
economists have pointed out the following : — 

1. Large concerns can more easily experiment with new methods, and with 
new machinery which is sometimes too expensive for a small establishment. 

2. They can best utilize a multitude of by-products. In refining petro- 
leum, for instance, material which was formerly wasted is now utilized for the 
production of lubricating oil, naphtha, and parafhne. 

3. They can effect large savings by carrying on allied or subsidiary pro- 



166 PRINCIPLES OF POLITICAL ECONOMY 



IV. Is the Tendency toward Large-scale Production Inevitable 

and Desirable ? 

If the evolution which we have just studied should con- 
tinue in the future, it would involve the gradual disappear- 
ance, from the economic field, of all those persons who work 
under their own guidance, — small artisans, small shop- 
keepers, small landholders, and all other autonomous pro- 
ducers. These persons, now economically their own masters, 
would become employees, i.e. wage-earners, working for im- 
mense enterprises directed by capitalists possessing millions, 
or for stock companies consisting of persons whose names are 
not publicly known. 

This prospect is agreeable to many economists and to all 
collectivist socialists. The latter especially declare that 
this evolution is inevitable, and ridicule every effort to put 
hindrances in its way. They rejoice at every successive 
step by which small industry gives way to large concerns, 
and individual production tends toward large-scale collective 
production, because they consider these steps as mile-posts 
marking our progress on the road that leads straight to 
collectivism. 1 

They profess, moreover, a sovereign contempt for small 
production and individual enterprises. " This system," says 

cesses. Large sugar refiners, for example, import their own raw sugar, own 
their own wharves and warehouses, and make their own barrels and boxes. 

4. They more readily acquire a wide reputation, and can more easily 
attract customers by means of advertisements, efficient and specialized ser- 
vice, and conveniences for customers which would be impossible in a small 
business. Some of the large department stores now have elegant waiting- 
rooms, bureaus of information, post offices, and telegraph offices. 

1 A vigorous but remarkably fair statement of the collectivist position on 
this point is given by the Belgian socialist, Emile Vandervelde, in a book 
entitled, "Le Collectivisme et l'Evolution Industrielle," Paris (Bellais), 1900. 

The tendency toward concentration into large establishments is probably 
most manifest in manufacturing. Interesting data regarding this tendency 
may be found in Vol. VII of the Twelfth Census. On page cccxvii the state- 
ment is made that the total number of manufacturing establishments increased 



LARGE-SCALE PRODUCTION 167 

Karl Marx, " excludes concentration, cooperation on a large 
scale, the extensive use of machinery, the wise rule of man 
over nature, agreement and unity in the purposes, the 
means, and the efforts of collective activity. It is compat- 
ible only with a rudimentary state of production and society. 
To perpetuate such a system of isolated production would 
be to decree mediocrity in all things." 

We cannot accept this somewhat sweeping condemnation. 
The predominance of small industries would, we believe, be 
very favorable to social peace and to a good distribution of 
wealth. By virtue of its extreme simplicity it would pre- 
clude most of the conflicts that now arise among the different 
classes of participants in production, and especially the bitter 
conflict between labor and capital. It would not establish 
the rule of absolute equality, fortunately; but it would 
cause no other inequalities than those due to differences in 
the productive power of land and of the other instruments 
of production, or inequalities that are inherent in all the 
actions and devices of man. Even from the productive 
point of view, small production is not so impotent or out of 
date as it is supposed to be. Independent small producers 
may associate and adopt some of the processes of large-scale 
production, as well as a more extended division of labor, 
without sacrificing their autonomy, their initiative, or their 
personal interest (all of which are powerful incentives to 
production, and always liable to be somewhat attenuated 
by collective enterprise). 

In agriculture, for instance, small farms are not absolutely 

101.8 per cent between 1880 and 1900, while the total value of products 
increased 142.2 per cent in the same interval. 

The application of motive power has greatly increased the productivity of 
many establishments. In 1890, 28.3 per cent of the manufacturing concerns 
of the country used motive power ; in 1900, 33.1 per cent. Still more strik- 
ing is the increase of average horse-power per establishment: in 1880 it 
was 39.7 ; in 1890, 59.1 ; in 1900, 66.7. In the twenty years from 1880 to 
1900, therefore, there was an increase in the average power per establishment 
of twenty -seven horse-power,, or 68 per cent. 



168 PRINCIPLES OF POLITICAL ECONOMY 

incompatible with association, nor even with the introduction 
of processes of large-scale cultivation. Small farmers may 
associate with one another to apply to their lands all the 
improved methods of farming, to purchase or hire machinery 
or other modern devices in common, to buy fertilizer, seeds, 
and plants in large quantities, to transport and sell their 
products at common expense, and to borrow capital. Indeed, 
all these things are already being done — on a small scale, 
it is true, but with increasing success — by farmers' syndi- 
cates, granges, etc. 1 

It must, nevertheless, be conceded that association among 
land-owners, whenever, extending beyond the effort to do a 
certain amount of business in common, it also undertakes the 
common cultivation and management of farms, presents very 

1 There have been many attempts at association among the farmers of this 
country, although most of them were of short duration. (See the articles on 
Cooperation, Farmers' Alliance, Farmers' Movement, and on Grangers in 
the " Encylopsedia of Social Reform," edited by W. D. P. Bliss.) 

In France, the so-called agricultural syndicates number about three thou- 
sand, and many of them have more than eight thousand members each. 
They have already introduced important reforms in the agriculture of the 
country. They contribute to the education of French farmers by publish- 
ing numerous journals, by propagating new processes, and by establishing 
experimental farms. They have attempted the sale in common of some com- 
modities, such as wine, vegetables, and fruit, and even tried the production in 
common of some goods ; the latter scheme has thus far succeeded very well 
only in the manufacture of cheese and butter. These organizations encour- 
age cattle-raising by buying breeders of pure stock. They have endeavored 
to create banks for mutual credit, and a law has been passed recently in 
France to facilitate this movement. They unite to form powerful federations 
and unions that sometimes cover an entire farming district of the country. 

The rapid and remarkable development of these associations in France 
has given rise to ambitious hopes for the future, and some persons regard 
them as the beginning of a peaceful social revolution that will bar the way 
to socialistic revolution. (Consult Rocquigny's " Les Syndicats agricoles.") 

Farmers' associations are quite as fully developed in Germany, Denmark, 
and Belgium. In Germany the wine-raisers on the banks of the Rhine have 
carried out a scheme for making their wine in common. In Denmark the 
entire agriculture of the country has been transformed by the cooperative 
dairies, which have succeeded in driving French butter out of the English 
market. 



LIMITS OF LARGE-SCALE PRODUCTION 169 

grave difficulties. Indeed, such productive associations can 
be formed with advantage only for farms that are contigu- 
ous. Close neighborhood among farmers is generally more 
liable to give rise to lawsuits than to facilitate association. 
The jealousy of farmers is proverbial. 

But among those that work in manufactures association 
will perhaps be easier. Cooperative association, — under the 
different forms of productive associations, societies for the 
purchase of raw materials or for the sale of finished goods, 
or societies for mutual credit, — aided by the mechanical inven- 
tions that are substituting electric power for steam, and 
enabling us to transport motive power from the place of its 
generation to the place of its application, will permit numer- 
ous new forms of industrial enterprise capable of resisting 
successfully the encroachments of large-scale industry. De- 
vices for distributing motive power place small producers 
nearly on a*plane of equality with large concerns, as regards 
the cost of power. 

Besides, it is by no means certain that large-scale produc- 
tion has no limit. It is probable, on the contrary, that it 
cannot go beyond a certain fixed point. The growth of 
social organizations, like that of living organisms, seems to 
be restricted by nature within certain bounds. Some de- 
partment stores, such as exist in the largest cities, appear 
already to have attained a state of development that is nearly 
permanent. Perhaps an economic reason for this may be 
found in the fact that, beyond a certain point, the general 
expenses of large stores are proportionately increased rather 
than diminished. Thus there is a limit to the size of busi- 
ness enterprises. 1 



1 Some authors contend that the economy of large-scale production is often 
counterbalanced by nearly equivalent disadvantages and expenses, such as 
expensive advertising, the cost of surveillance, leakage, and wastes. 

President John Converse, of the Baldwin Locomotive Works, is authority 
for the statement that these works have reached the limit of economy 
and efficiency in production ; machinery, space, and labor are as fully 



170 PRINCIPLES OF POLITICAL ECONOMY 

At all events, evolution toward large production does not 
proceed with equal rapidity in all fields of economic activity. 
It is far advanced in transportation, a trifle less so in manu- 
factures, still less in commercial enterprises, while in agricul- 
ture it is scarcely perceptible. Certainly it cannot be said in 
any part of Europe that small farming is giving way to farm- 
ing on a very large scale. Collectivists, to be sure, who agree 
in this point with most economists of the classical school, main- 
tain that this is only an anomaly, an accident, a simple delay in 
evolution, due to the routine character of agriculture. They 
point particularly to the example of the United States, where 
agriculture in the West is practised on a large scale, and 
ask : Is not this the reason why American farmers defeat 
European competitors even in European markets? 

But the example of the United States proves nothing 
against our thesis. The colossal farms of this country, 
although they have the advantage of producing wheat at a 
low cost, have the disadvantage of giving relatively small 
crops. Crops of wheat on the " bonanza " farms rarely 
exceed thirteen bushels an acre, whereas inferior land in 
France yields an average of twenty bushels. 1 Extensive 
culture is made possible in the United States by the relative 
cheapness of land and the sparseness of population. But 
when the population will have become as dense as that of 
France it will be necessary to increase the crops by giving 

utilized as possible, and there would be no proportionate gain in increas- 
ing any of these productive factors. In other words, it would be more 
profitable to duplicate the plant on another site than to double the present 
equipment. 

A summary of the advantages and disadvantages of large-scale production 
is given by Bullock, " Introduction to the Study of Economics," §§ 100-103, 
and in Leroy-Beaulieu's "Economie Politique," Vol. I. 

Production on a small scale, its present status and future prospect, are 
discussed from the standpoint of a Catholic reformer in Victor Brant's "La 
petite Industrie contemporaine," 2 e edition, Paris, (Lecoffre), 1902. 

1 The census of 1900, Vol. VI, p. 29, gives some interesting data re- 
garding this point. The great western wheat-producing states employing 
large-scale methods of farming are Minnesota, South Dakota, North Dakota, 



LIMITS OF LARGE-SCALE PRODUCTION 



171 



up the methods of extensive farming, and by concentrating 
labor and capital on smaller areas. 1 

The essential fact that should never be lost sight of is that 
although large farming involves some economy in general 
expenses and particularly an economy of labor, it has, on the 
other hand, the great twofold disadvantage of diminishing 
the number of producers, and, quite as often, of reducing the 
quantity of products when compared to the surface culti- 

Kansas, and California. Intensive, small-scale methods, on the other hand, 
are used in the New England states, whose soil, moreover, is naturally less 
fertile than that of the western farms. 





Average acres per 


Average value 


Average bushels 




farm reporting' 


per acre 


per acre 


Kansas 


63.7 


$5.03 


10.2 


South Dakota 


95.7 


5.26 


10.5 


North Dakota 


134.5 


7.13 


13.5 


California 


212.9 


7.52 


13.6 


Minnesota 


52.0 


7.71 


14.5 


New Hampshire 


1.7 


12.65 


14.9 


Connecticut 


1.8 


15.47 


22.0 


Khode Island 


1.9 


16.33 


20.7 


Maine 


2.0 


16.11 


17.5 


Massachusetts 


2.0 


15.95 


18.4 


Vermont 


2.0 


16.19 


19.3 



1 The census of 1850 reported 1,449,073 farms in the United States, and 
that of 1900 reported 5,739,657, — an addition of 4,290,584 in fifty years. 
The same period witnessed an increase in the national population from 
23,191,876 to 76,303,387, and a growth in the cities (of over 8000 population) 
from 2,897,586 to 25,031,505. Notwithstanding this unprecedented growth in 
urban population, the increase in the number of farms was relatively greater 
than that of the total population, being in the ratio of 4 to 3.3. If we con- 
sider the population outside of cities, the following figures are obtained: 
In 1850 there was one farm for every 14 persons, and in 1900 one farm for 
every 8.9 persons. 

As regards the average size of farms the official figures are as follows : 
In 1850, 202.6 acres; 1860, 199.2; 1870, 153.3; 1880, 133.7; 1890, 136.5; 
1900, 146.6. But it must be observed that the very large farms are confined 
almost exclusively to the western and central states. 



172 PRINCIPLES OP POLITICAL ECONOMY 

vated. It may give a greater net product, i.e. greater profit 
to the landowner, but it generally yields a smaller gross prod- 
uct, i.e. less food and less wages for the nation. Now in 
view of the increasing density of population in all civilized 
countries, the future will belong to the system of farming 
that can give the greatest quantity of food. Here we find 
another proof, and the explanation, of the law mentioned 
when we referred to the area required by various types of 
society to produce their food-supply, viz., that the necessary 
area is reduced as we proceed from the hunting stage to the 
pastoral, and from the pastoral to the agricultural. In the 
agricultural period itself, there is the same progress from 
" extensive " to " intensive " farming, and from intensive 
farming to garden -farming such as is practised to-day wher- 
ever population is most dense, i.e. in the suburbs of large 
cities. Garden-farming, in the vicinity of Paris, where fruit 
and vegetables are raised by hothouse processes that resem- 
ble the methods used for raising flowers, is said to yield from 
$ 2000 to 13000 worth of vegetables per acre, or enough to 
provide food for twenty or twenty-five persons. In China, 
a system of very elaborate intensive garden-farming enables 
the soil to nourish a very dense population. Here, then, are 
many reasons for thinking that the prophecies of the social- 
ists and of some economists regarding this matter (the sole 
point upon which they agree) may be found wanting in 
accuracy. The future probably belongs to small farming 
rather than to large-scale agriculture. The earth will some 
day be covered with small garden-farms, and the philosophi- 
cal maxim of Voltaire's Canclide, " Everybody will cultivate 
his own garden," will be realized in the field of economics. 1 

1 One circumstance that gives rise to the illusion concerning the natural 
superiority of large-scale agriculture is the intellectual superiority almost 
always possessed by the administrators of large farms ; the great farms are 
better kept, and exemplify the latest agricultural improvements. We con- 
sequently attribute to a difference of agricultural system what really is due 
only to the greater energy and intelligence of the persons in charge. 









CHAPTER III — THE DIVISION OF LABOR 



I. The Successive Forms of the Division of Labor 

Association, of itself, means nothing more than the group- 
ing of individual forces, each person performing the same oper- 
ation ; this may be called simple cooperation. But the term 
" division of labor " implies a distribution of the work among 
the associated persons in such a manner that each performs a 
different operation ; this may be called complex cooperation. 
If the work to be done is very simple, — like digging, lifting, 
rowing, or wood-chopping, — -it is difficult to divide the work 
into several operations ; each person must execute the same 
movements. But whenever the task is more complex and 
comprises various operations, there is some advantage in 
splitting the work into as many fractional tasks as pos- 
sible, and assigning a part of it to each of a number of 
persons. 

The earliest form of the division of labor was the division ac- 
cording to sex, the men doing one kind of work and the women 
another. The distinction of sex gave rise to a difference 
of economic functions, and the rudimentary division of tasks 
thus evolved coincided with the first phase of economic 
evolution, — the phase which we have called the home or 
family economy. Yet this division of labor is far from cor- 
responding to the modern conception of the peculiar province 
of the two sexes, viz., the idea that man should perform the 
hard work and woman the household duties. This is by no 
means the original view of the r61e of the sexes. Originally 
man took the noble occupations, such as hunting, fighting, 
the care of cattle, while woman did the base labor, including 

173 



174 PRINCIPLES OF POLITICAL ECONOMY 

not only the household work, weaving, etc., but also the labor 
of carrying goods like veritable beasts of burden. Cur a 
agrorum feminis delegata, says Tacitus, in speaking of the 
Germans; we observe the same thing nowadays among all 
the tribes of Africa. Woman was really the first slave, and 
the first kind of slavery so-called, — that of captives taken 
during intertribal warfare, — was for her the first step toward 
emancipation, because it unburdened her of the heavier kinds 
of labor (such as grinding the grain or turning the mill- 
stone) which were transferred to the slaves. 

The second phase — that of corporations or guilds — coin- 
cided with a more detailed division of labor, viz., the rise of 
separate trades. Each guild or trade organization performed 
only one kind of labor, and the rules of the guilds exerted 
a jealous care that each one was confined to its particular 
specialty. The specialization of trades kept pace with the 
gradual perfection of the guild system ; industries were di- 
vided and subdivided into branches or groups that performed 
but one part of a trade. The wood-workers, for example, were 
divided into carpenters, cabinet-makers, wheelwrights, etc. 
Even allied trades, such as the glovers, girdlers, pocket makers, 
skinners, white tawyers, and other workers in leather ; or the 
fletchers (arrow-makers'), the bowyers (makers of bows), and 
the stringers (makers of bowstrings), were organized into 
separate bodies. There were no fewer than a hundred 
craft-guilds in Paris in the middle of the thirteenth century, 
each of which was regarded as forming a separate trade 
organization. 1 

In the third phase, that of the workshop and domestic man- 
ufacturing, the division of labor attains the highest degree 
of perfection. It was in the workshop that the wonderful 
phenomenon of the division of labor first attracted the atten- 
tion of Adam Smith, and led him to write those classical 
pages on the subject in his " Wealth of Nations " which have 

1 The German statistics for 1882 enumerated 6459 different occupations, 
not including the liberal professions. 



THE DIVISION OF LABOR 175 

been reproduced time and time again. 1 All industrial labor, 
as we have seen, is simply a series of movements (see page 
73), and despite its apparent complexity may be divided 
into a number of simple operations. If, now, we assign each 
simple movement to one laborer or group of laborers, each 
laborer or group will constantly perform the same operation. 

1 Speaking of the trade of the pin-maker, Adam Smith says (Book I, Chap- 
ter 1, of the " Wealth of Nations ") : "A workman not educated to this busi- 
ness (which the division of labor has rendered a distinct trade), nor 
acquainted with the use of machinery employed in it (to the invention of 
which the same division of labor has probably given occasion), could scarce, 
perhaps, with his utmost industry, make one pin in a day, and certainly 
could not make twenty. But in the way in which this business is now car- 
ried on, not only the whole work is a peculiar trade, but it is divided into a 
number of branches, of which the greater part are likewise peculiar trades. 
One man draws out the wire, another straights it, a third cuts it, a fourth 
points it, a fifth grinds it at the top for receiving the head ; to make the head 
requires two or three distinct operations ; to put it on is a peculiar business, 
to whiten the pins is another ; it is even a trade by itself to put them into the 
paper ; and the important business of making a pin is in this manner divided 
into about eighteen distinct operations, which, in some manufactories, 
are all performed by distinct hands, though in others the same man will 
sometimes perform two or three of them. I have seen a small manufactory 
of this kind where ten men only were employed, and where some of them 
consequently performed two or three distinct operations. But though they 
w r ere very poor, and therefore but indifferently accommodated with the neces- 
sary machinery, they could, when they exerted themselves, make among 
them about twelve pounds of pins in a day. There are in a pound upward of 
four thousand pins of a middling size. Those ten persons, therefore, could 
make among them upward of forty-eight thousand pins in a day. Each per- 
son, therefore, making a tenth part of forty-eight thousand pins, might be 
considered as making forty-eight hundred pins in a day. But if they 
had all wrought separately and independently, and without any of them 
having been educated to this peculiar business, they certainly could not each 
of them have made twenty, perhaps not one pin in a day ; that is, certainly 
not the two hundred and fortieth, perhaps not the forty-eight hundredth 
part of what they are at present capable of performing, in consequence of a 
proper division and combination of their different operations." 

The example chosen by Adam Smith is out of date, since pins are now 
made by machinery, and one thousand persons suffice to turn out, on an 
average, twenty-five tons of pins per week. In Adam Smith's time not less 
than four thousand two hundred were required for the production of about 
one-seventh of that quantity. 



176 PRINCIPLES OF POLITICAL ECONOMY 

In the next phase, — that of factories, — the division of 
labor seems almost to have retrograded ; or rather, not men 
but machines do the specializing. 

Finally, there is beyond this another form of the division 
of labor, which may be called international division of labor, 
because it has grown up under the influence of the develop- 
ment of international transportation and exchange. Each 
nation devotes itself more especially to those branches of 
production which seem best adapted to its soil, its climate, 
and the abilities of its inhabitants. 1 This tendency, however, 
which thirty years ago appeared to be making great progress, 
is now arrested at least momentarily by the protectionist 
movement, which tends to make each country an autonomous 
market. 

II. The Conditions of the Division of Labor 

Division of labor is evidently most nearly perfect when- 
ever labor may most easily be cut up into many separate opera- 
tions. But the number of workmen must necessarily be 
proportionate to the number of these distinct operations. 2 It 
is furthermore evident that the number of workmen which an 
employer can afford to hire depends on the amount of goods 
to be produced. And as the amount of goods produced de- 

1 Some economists have referred to the territorial division of labor, which 
is essentially the same as international division of labor, explained above, 
and the hereditary division of labor, by which certain occupations tend to be 
confined to certain families or races. 

2 It would be a great mistake to suppose that we could carry out the divi- 
sion of labor by employing one workman for each distinct operation ; gen- 
erally, a larger number is required. Suppose that the making of needles 
comprises three operations : making the point, making the head, and piercing 
the eye. Suppose that it takes ten seconds to make each point, twenty for 
each head, and thirty for each eye. It is evident that in order to keep busy 
the workman who makes the points, we need two men to make heads and 
three to make eyes. It is therefore necessary to have, not three but six 
workmen, else the first one will remain idle a great part of the time. It 
would be easy to complicate further our hypothesis in illustration of this 
fact. 



THE DIVISION OF LABOR 177 

pends necessarily on the size of the market, we may say in 
the last analysis that the division of labor is directly propor- 
tionate to the size of the market. 

This is why, as every one doubtless has observed frequently, 
the division of labor prevails to a great extent only in large 
centres of population, and is almost unknown in the country 
or in small villages. A country store usually deals in a pell- 
mell variety of goods, — spices, meats, toys, stationery, dry 
goods, and many other articles which in a large city would be 
distributed among different stores. 1 The reason for this is 
simple. The village storekeeper is obliged to deal in many 
things, to be a Jack-of-all-trades, because a single trade would 
not be sufficient to enable him to earn a livelihood. 

Most books on political economy mention a second condi- 
tion necessary for the division of labor, viz. : continuous, not 
intermittent, production ; hence the conclusion is drawn that 
the division of labor is not applicable to agriculture. This 
conclusion is too sweeping. Division of labor on a farm 
cannot, to be sure, be managed in the same manner as in a 
workshop. It would be too expensive to have one man 
sow, another reap, another gather grapes, or take care of the 
vines, or plant them ; because each of these operations must 
take place only at a fixed season of the year and for a limited 
number of days. Hence the workman whose task is limited to 
one of these operations would be idle eleven months out of 
twelve. But it is possible, or at any rate it would be desir- 
able, to introduce the division of labor in another form by 
having each man or group of men devoted to the cultivation 
of a specific plant. It is even probable that to the extent 
that agriculture grows more intensive and more akin to hor- 
ticulture, this specialization will take place. 

1 It would seem at first sight that the city department stores do the 
same thing as the country stores. But these large stores really carry out a 
very thorough division of labor, each department having its own special man- 
ager. Each of the important branches of the business of a large department 
store, moreover, has its own " buyer," who has charge of the purchasing and 
marking of goods, and who sometimes receives as much as $30,000 a year. 



178 PRINCIPLES OF POLITICAL ECONOMY 

III. The Advantages and Disadvantages of the Division of 

Labor 

Division of labor increases the productive power of labor 
in proportions that surpass imagination. The reasons for 
this are as follows : — 

(1) As we have already explained, the most complicated 
work can be divided into a series of very simple and almost 
mechanical operations, which are therefore very easy to per- 
form ; in this way production may be facilitated to an amazing 
degree. 

Indeed, these operations may become so simple that man's 
labor is unnecessary, and a machine will do the work just as 
well. It is the division of work into simple constituent parts 
that has made it possible to construct machinery for doing 
work that at first sight appears to be most complicated. 

(2) The division of labor creates a great diversity of 
tasks, each of which differs from the others in point of diffi- 
culty and of the strength or attention it requires. Hence 
we may fit each of these tasks to the individual capacities of 
the workmen. We can utilize each man's natural aptitudes, 
and thus avoid the waste of time, strength, and capital which 
would result from having the same work done by all the 
workmen, whether they are strong or weak, ignorant or 
intelligent. In other words, we may thus avoid squander- 
ing the energy of the strongest and the most capable on work 
that is too easy for them, or wasting the labor of the weak 
and the ignorant on tasks that are beyond their powers. 

(3) The constant repetition of the same task results in devel- 
oping remarkable dexterity in manual labor, just as, in intel- 
lectual labor, sustained and persevering application singularly 
develops the intellectual faculties, and consequently the power 
to produce. Doctors, lawyers, painters, novelists, scientists, 
all have their specialties nowadays; and each man finds it 
to his advantage to settle in one little corner of the domain 
of human knowledge and diligently explore that part alone. 



THE DIVISION OF LABOR 179 

To the above three reasons it is customary to add three 
others of less importance. 

(4) Economy of time, which results from continuous work. 
A workman who changes often from one task to another, 
loses, at every change, not only the time which intervenes 
between the two occupations, but especially the time neces- 
sary for getting well started. 

(5) The economy of implements, which reaches a maximum 
when each laborer employs but one tool, and uses that one 
constantly. 

(6) A shorter period of apprenticeship. The time needed 
to learn a trade is proportionate to its complexity. 1 

But as opposed to all these advantages, some serious draw- 
backs have long been pointed out : — 

(1) The degradation of the workman, who performs the 
same simple operation all the time and is thus reduced to 
the r61e of a mere machine. 2 

To this objection the reply may be made that the intro- 
duction of machinery constantly tends to remove this evil 
effect of the division of labor. Indeed, we may be sure that 
as soon as any productive operation becomes so simple as to 
be purely mechanical, it will not be long before the workman 
will be replaced by a machine, since machine labor is cheaper 
than human labor in such a case as this. 

Again, the reduction in the length of the workday, leav- 
ing the workman spare time in which to employ his mind and 
body in normal ways, must also be regarded as an indispen- 
sable corrective of the division of labor in modern industry. 3 

1 The suppression of apprenticeship, which is quite as much due to the 
introduction of machinery as to the division of labor, is in itself a regrettable 
circumstance, and efforts are now being made in many countries to counteract 
its unfortunate effects by creating trade schools. 

2 Lemontey has put this objection into a classical phrase : " It is a sad 
confession for a man to make that during his whole life he has done nothing 
more than make the eighteenth part of a pin." 

3 The socialist Fourier believed that by the aid of what he called short ses- 
sions all the advantages of the division of labor might be obtained without 



180 PRINCIPLES OF POLITICAL ECONOMY 

(2) The extreme dependence of the workman who is 
incapable of doing anything except the particular and en- 
tirely special operation to which he has become accustomed, 
and who, therefore, is in constant danger of being helpless 
when discharged or when the progress of industry makes his 
particular task unnecessary. Like the parts of the commod- 
ity which he helps to make, and which are worthless unless 
combined with the other fractional parts that make up a 
whole product, he, too, may be said to have no more impor- 
tance than that of a single wheel in the vast industrial 
machine ; without the other supplementary parts he has no 
value and his toil is worthless. 

What, then, must be our final judgment regarding the 
division of labor? 

If we consider it as applied in factories, no hesitation is 
possible. The advantages of the division of labor far out- 
weigh its disadvantages, and these disadvantages, even, are 
largely imaginary. To be sure, there are many kinds of 
mechanical work that stunt the intelligence ; but this is not 
due to the division of labor. The work of a street-sweeper 
is not divided. Is it therefore nobler than that of a laborer 
who makes nothing but nails ? And, as some one has wittily 
remarked, would the workman who makes only pinheads 

its disadvantages. He planned that each laborer should ply not one but^ 
several trades, and pass in turn from one to another. The advantages of 
specialization thus are retained ; for a man need not work at one thing his 
whole life to be able to do it well. He may, thanks to division of labor, 
become skilful in five or six different operations or trades, especially if they 
are simple ones. Moreover, the deadening monotony of always performing 
the same kind of work is avoided, and Fourier endeavored thus to satisfy 
what he very picturesquely called the "butterfly " instinct, that prompts us 
to like change. This idea is by no means absurd, though it has been much 
ridiculed ; but its execution would require that the workers could change 
work without losing too much time. Hence Fourier invented his " Phalan- 
stery," where all laborers are assembled, in order that this rotation of work 
might be managed easily and in such a way that there would be no difficulty, 
for instance, in having the blacksmith abandon his anvil and turn to rose 
gardening. 



THE DIVISION OF LABOR 181 

gain much intellectually and morally by making whole pins ? 
Admitting, moreover, that apprenticeage has been done away 
with, its place can be taken advantageously by some plan for 
giving the workman a general trade education that will help 
him, although himself confined to a single fractional task, to 
understand what position he occupies in the whole trade, and, 
if need be, enable him to pass from one branch of it to another. 

But when, broadening the scope of our inquiry, we ask 
whether the social division of labor into special trades and 
occupations is good, and whether it should be regarded as 
the normal economic organization of the future, we hesitate 
to reply affirmatively. Certainly this division of labor makes 
men dependent on each other, and, like the physiological 
division of labor among the organs of a living body, it seems 
to make all the members of society parts of one and the same 
organism, and thus realizes the ideal of those who insist on 
the principle of social solidarity. Indeed, many sociologists 
point out this analogy approvingly. 

We, too, believe in social solidarity and interdependence. 
We hold with M. Espinas that "the aptitude for living apart 
from others is only a very inferior mark of individuality." 
The aptitude for isolation, indeed, is really a characteristic 
of the savage, and the savage is no longer the ideal type of 
humanity, as he was for the writers of the eighteenth century. 
But we dislike to regard the division of labor as the basis of 
solidarity, for the reasons that it is, first, an unconscious fact 
of a quasi-physiological nature, and, secondly, because it 
implies the increasing differentiation of individuals and tends 
to subordinate everything to the interest of trade and produc- 
tion. 1 Now true solidarity tends to bring men together and 

1 M. Durkheim, in his remarkable book on " La Division du Travail 
Social," regards the division of labor as the fundamental social law. He 
even considers it to be the foundation of ethics, and maintains that the differ- 
entiation of individual tasks makes each person incapable of sufficing unto 
himself and hence obliges him to render reciprocal services and to establish 
a system of mutual consideration and assistance. 

The division of social labor is, moreover, according to Durkheim, both 



182 PRINCIPLES OF POLITICAL ECONOMY 

to unite them, not to send them off in divergent directions ; 
it seeks to give each man a more complete and perfect indi- 
viduality, not to make him more and more insignificant by 
reducing him to the level of a mere wealth-producing, wealth- 
transmitting, or wealth-exchanging machine. 

It is to be hoped, therefore, that the division of social labor 
into trades and professions will not endanger the thorough 
and harmonious development of human personality. This 
hope is perfectly realizable if everybody can reserve, apart 
from the hours given to his particular occupation, an increas- 
ing share of his time and activity for domestic, civic, intel- 
lectual, religious, and aesthetic pursuits. From this point of 
view, a reduction of the hours of labor is a matter of primary 
importance. (See Book IV.) 

the effect and the corrective of the struggle for life. As the struggle for 
life is most intense when individuals are most alike and have the same wants, 
everybody tries to become a specialist and endeavors to do something dif- 
ferent from the others ; thus the division of labor is the effect of the struggle 
for life. The division of labor enables individuals to escape competition and 
thus to escape ruin or extermination ; hence it is also a corrective of the 
struggle for life. 



BOOK III. THE CIRCULATION OF 

WEALTH 



The circulation of wealth, more frequently called exchange 
in English treatises on political economy, is really only a part 
of production, and in the preceding editions of this book it 
was so presented. Indeed, exchange is not an end in itself, 
for wealth is not exchanged simply for the sake of exchange. 
Exchange and credit (which form the two essential parts of 
the circulation of wealth), and the ingenious devices to 
which they give rise, are really only methods of organizing 
labor, — methods having absolutely the same purpose as asso- 
ciation and the division of labor, namely, to facilitate pro- 
duction. The division of labor and exchange are logically 
and practically inseparable from each other. 

Notwithstanding this fact, most treatises on political econ- 
omy devote a special section to the phenomena of exchange 
and credit. They do this not only because these subjects 
are very important and extensive, and it is pedagogically 
desirable to have symmetrical divisions of the science, nor 
simply because they cover what is called commerce as dis- 
tinguished from industry and agriculture, but principally 
because these new methods of organizing labor coincide with 
a separate and distinct stage in the productive process. 
When wealth is once created, the next step is to transfer it ; 
it does not again change form, but it changes owners. 



183 



CHAPTER I — EXCHANGE 

I. The History of Exchange 

Exchange occupies an exceedingly important place in 
modern life. Nearly all the wealth that is created is pro- 
duced for the purpose of being exchanged. Take the wheat 
in the granaries, the vegetables in the barn, the cloth at the 
tailor's, the shoes at the shoemaker's, the jewels at the gold- 
smith's, the bread at the baker's, and ask : What part of all 
this wealth is destined by the producer for his own consump- 
tion ? Very little or none at all. All these things are mer- 
chandise, i.e. objects intended for sale. Our thrift, our skill, 
our talents also, are most frequently applied not to satisfy 
our own wants, but those of others. It happens very rarely 
that lawyers, physicians, and notaries have to work for them- 
selves, pleading their own cases, healing their own ailments, 
drawing up their own documents. They, too, regard these 
services only from the point of view of exchange. This is 
why, when we estimate our wealth, we do not estimate it 
according to its utility for us, but solely according to its 
exchange value, i.e. its utility for others. 

It must not be supposed that this state of affairs has always 
prevailed. Exchange is by no means so simple a process as 
association or as the division of labor, both of which are so 
natural that even certain animal species put them into prac- 
tice. Far from being instinctive, exchange seems originally 
to have been antipathetic to human nature. Primitive man 
regarded the product of his labor almost as a part of himself. 
Hence all sorts of strange and solemn formalities were at the 
beginning attached to every transfer of goods, e.g. the 
mancipatio of Roman law. Curiously enough, gifts seem to 

184 



HISTORY OF EXCHANGE 185 

have been prevalent before exchange, and it is even supposed 
that gifts gave rise to exchange in the form of a fictitious 
reciprocal donation. 1 

In the first phase of industrial organization — that of the 
family — there evidently could be no exchange, as each 
group formed an autonomous, self-sufficing organism. It 
was solely by the labor of its members and its slaves, and 
later by the toil required of the serfs, that the group provided 
for the satisfaction of its wants. 2 Exchange took place only 
in those exceptional or accidental cases when a few exotic 
products were sold by foreign merchants who brought them 
from abroad. (See the section on Merchants.) 

In the second phase — that of corporative or guild pro- 
duction — exchange necessarily results from the separation 
of trades. It is, however, limited to one town. Producers 
and consumers, who are also fellow-burghers, meet at the 
town market. Merchants from without soon succeed in pene- 
trating these markets, but not without great difficulty and 
long struggles, and only under certain rigorous restrictions. 3 

In the third phase — that of manufacturing — the market 
grows wider and becomes national. Here exchange and 
commerce really begin. It has been observed that the rise 
of national markets coincides with the formation of the great 
modern states. It is noteworthy that in France the growth 
of a national market took place at the same time that Vauban 
did away with urban fortifications and built a national system 
of fortifications ; this coincidence demonstrates in a striking 
fashion the fact that economic, political, and military evolu- 
tion everywhere follow along parallel lines. 

The market becomes still larger by becoming colonial, when 
the economic life of a nation is not confined within its own 

1 See Herbert Spencer's " Sociology," Part IV. 

2 Consult Buecher, "Industrial Evolution," and Cunningham, "Western 
Civilization in its Economic Aspects." 

3 Foreign merchants usually were permitted to sell goods in the cities only 
on these conditions : (a) they had to pay a fixed tax ; (6) they could not sell at 
retail, i.e. to the public, but only to the merchants of the locality ; (c) they 



186 PRINCIPLES OF POLITICAL ECONOMY 

borders but extends to its colo-nial possessions. This exten- 
sion of the market began in the seventeenth century, at the 
time when the great commercial companies were founded that 
subsequently played an important part in history (for example, 
the English East India Company). 

Then, finally, in the fourth stage — that of machinery, rail- 
roads, and steamboats, — the market becomes truly interna- 
tional, and commerce acquires the enormous dimensions that 
have helped profoundly to modify the economic relations of 
the world, and have made the problem of international trade 
one of the most important problems of our epoch. 1 

II. Exchange Value 

It is an academic problem whether the concept of value 
can exist apart from that of exchange. We believe that it 
can. Value, as w r e have said, is the expression of a scale or 
classification of various kinds of wealth, of preferences, or of 
degrees of desirability. Even Robinson Crusoe had a com- 
parative scale of values ; there were some things he prized 
more highly than others, and he showed his preferences by 
the order in which he saved goods from the shipwreck, since 
he naturally chose the most desirable objects first. There 
may be value, therefore, without exchange. We admit, 
however, that in social life exchange is practically the sole 
determinant of the idea of value. Exchange removes the 
notion of value from the inner consciousness in which, so to 
speak, it was slumbering, and makes it definite and vivid. 
Exchange leads us to compare our preferences, and makes 
them more precise and positive. 

The old economists, beginning with Adam Smith, or rather 

could sell only at certain times of the year and at specified places. See 
Ashley's "Economic History of England," and Cheyney's "Industrial and 
Social History of England" (Macmillan, 1901). 

1 We do not, of course, pretend that the chronological history of commerce 
coincides exactly with the above outline ; we have endeavored simply to give 
a general sketch of its tendencies — a sort of mnemotechnic generalization. 



EXCHANGE VALUE 187 

with Aristotle, distinguished two kinds of value: first, value 
in use (which may also be called individual value), and 
second, value in exchange (which may be called social value). 
They showed that these two values may be quite different from 
each other. For instance, spectacles have great value for a 
near-sighted scientist who could not read without them, but 
their value in exchange is rather small ; on the other hand, 
diamond ear-rings, which may have a very high exchange value, 
have for him absolutely no value in use. 1 

What is the reason for this difference ? Value in use is 
determined solely by the wants and desires of a person at a 
given moment ; it has no other foundation than subjective use- 
fulness. On the other hand, value in exchange appears to 
have a more objective character ; it is uniform in one and 
the same market, 2 and is called current price. Indeed, this 
value or price is " quoted " regularly in the newspapers for a 
multitude of commodities, and serves as a basis for specula- 
tion.. While value in use is simply the result of individual 
subjective judgments, value in exchange seems to take pre- 
cedence over individual judgments and obliges sellers and 
buyers to " follow the market." This is not only a matter 
of everyday experience, but an economic law of the greatest 

1 A five-dollar bill certainly has not the same value in use, that is to say, 
not the same utility, for a millionnaire as for a poor man. To the poor man it 
means several clays' subsistence, whereas to the millionnaire it means merely 
some insignificant bauble that he might buy with it. On the other hand, it 
is evident that the bill has for both the same value in exchange, inasmuch as 
all five-dollar bills have the same value, and one bill will buy as much as 
another, under similar circumstances. 

2 " Market," in the economic sense of the term, does not mean a place or 
establishment in which goods are bought and sold, but the totality of sales 
and purchases — the whole sphere in which the transfer of merchandise and 
the communication between buyers and sellers is quick enough to establish a 
uniform price. The extent of markets varies according to the nature of the 
merchandise. The wheat market, for instance, may include a whole nation ; 
the market for gold extends over the whole world ; the market for vegetables 
is generally confined to a small district. 

See Francis Walker's interesting discussion of markets in his "Political 
Economy." 



188 PRINCIPLES OF POLITICAL ECONOMY 

importance, and may be formulated thus : In the same market 
there can be only one price for merchandise of the same quality. 1 
What, then, determines value in exchange? Formerly, in 
the classical treatises on political economy, the determination 
of exchange value was explained by a formula that was simple, 
and, in appearance at least, perfectly clear ; viz., that exchange 
value varies directly with the demand, and inversely with the 
supply. This formula is now quite discredited, — perhaps 
too much so. There are several objections that may be raised 
against it : — 

(1) Despite its appearance of mathematical exactitude, this 
rule is contrary to facts. If the supply of wheat were dimin- 
ished by half in a country having no commerce with other 
countries, its price would be much more than doubled ; it 
would be five times as high. 2 Again, if the supply of wine 
were diminished by half, we may be sure that the price of 
wine would not be doubled. 

(2) It mistakes the effect for the cause. If an increase in 
the demand raises the price, it is evident that the increase of 
price will in turn diminish the demand ; and if an increase 
of the supply makes prices fall, it is evident that lower prices 
will in turn tend to restrict the supply. In other words, 
instead of saying that demand and supply regulate prices, we 
may just as well say that prices regulate demand and supply. 3 

1 Stanley Jevons calls this the law of indifference, meaning that it is a matter 
of indifference whether we choose one or the other of two objects when they 
are identical ; we have no reason for preferring the one to the other, and will 
not consent to pay more for it — no matter how much more labor its pro- 
duction may have cost. 

2 An English economist of the seventeenth century, Gregory King, in a cele- 
brated law which bears his name, explained the relation between the quan- 
tity of wheat and its price. For deficits of 10, 20, 30, 40, and 50 per cent, 
we should have a rise in prices of 30, 80, 160, 280, and 450 per cent, re- 
spectively. It is of course true that this law, although valid at a time when 
England formed a closed market for wheat, has to-day lost all practical im- 
portance because of the international trade in cereals. 

3 Take any kind of securities selling on the stock exchange, for example 
3 per cent government bonds, and suppose them to be selling at $100. 



UTILITY THEOUY OF EXCHANGE VALUE 189 

(3) It attributes no intelligible meaning to the terms supply 
and demand. The word supply may, to be sure, mean the 
quantity of merchandise, the stock existing on the market, 
although in many cases a purely imaginary reduction of the 
supply (such as the bare fear of a bad harvest) may produce the 
same result as a real diminution. But what are we to 
understand by demand? The quantity in demand is in fact 
absolutely indeterminate, since it depends entirely on the 
price. At one cent a bottle, the demand for Bordeaux wine 
would be almost unlimited ; at $100 a bottle there would be 
hardly any demand at all. 

We must therefore inquire what other theories have been 
suggested in place of the classical formula. In this connec- 
tion we shall encounter again the two important theories out- 
lined in the section devoted to value in use ; namely, the 
theory of final utility and the theory of labor or cost. 

(A) Let us first examine the utility theory. Very ingen- 
ious as an explanation of subjective value, the theory of final 
utility finds greater difficulty in explaining exchange value. 
After showing that bread, for example, has a different value 
for each person, and may even have a different value for the 
same person at different times (according to his state of 
hunger or satiety), how can this theory account for the fact 

There is always a demand for a certain amount of these bonds, and usually 
a certain amount of them for sale. Suppose that at the opening of the stock 
exchange the amount of these bonds demanded is twice that of those offered 
for sale. Who would imagine that the price will double and reach $200 ? 
Yet this is what ought to take place if the classical formula is true. In reality, 
the price quoted for these bonds may not rise even $1, for the simple 
reason that the majority of people who would buy at $ 100 will withdraw as 
soon as the price rises above this point. It is evident that if the demand for 
bonds diminishes with every increase in the price, the supply, at the same 
time and for the same reason, will increase. A time must come, therefore, 
when the decreasing demand and the increasing supply are equal and form 
an equilibrium. Usually, a rise of but a few cents is sufficient to bring about 
this result. 

The same rules hold for almost all kinds of merchandise, to a greater or 
less extent. Everywhere and always, the supply and the demand tend to 
establish an equilibrium by means of the rise or fall in prices. 



190 PRINCIPLES OF POLITICAL ECONOMY 

that the exchange value or money value of wheat is the 
same in one market for millions of persons ; how, moreover, 
can it explain that the value of wheat does not vary much 
throughout the whole nation, nor differ greatly from one 
nation to another, nor change considerably from year to 
year ? 

The utility theory explains this by observing that in order 
to effect the transition from many individual values to a 
uniform exchange value of a commodity, we must take into 
account its final utility not only for the possessor but also 
for other persons, i.e. for possible purchasers. 

If, for instance, I have a thousand bushels of wheat in my 
storehouse, the thousandth bushel has no final utility for 
me, for surely I have no need of it. Yet it certainly has an 
exchange value, which is just the same as that of any other 
bushel; for although I myself have more wheat than I need, 
there are persons who have not enough, and for these persons 
my thousandth bushel has a final utility. This utility con- 
fers a value on the whole quantity. 1 

The manner in which the market price is fixed in an open 
market under ordinary circumstances may best be explained 
by an example. Suppose that at a given time there are 



1 In reality the problem is much more complicated than this. Fortunately 
for the consumer and for the general public, the market price is not always 
determined by the purchaser most desirous of buying, i.e. the person who 
attributes a maximum individual value to the object. For we must remember 
that the seller is not alone. There are other sellers quite as anxious as he 
to dispose of their goods — perhaps more so. Consequently, might we not 
just as well say that the price will be determined by the seller who is most 
desirous of disposing of his goods, or who is most in need of money, i.e. 
by him who attributes to the object the minimum individual (or subjective) 
value ? Under these conditions the problem would still remain unsolved. 

The Austrian school solves the difficulty by declaring that in reality neither 
of these two persons determines the price. On the contrary, they stand aside 
and wait until the rates are fixed by others. The buyer who is most dis- 
posed to offer a high price will not be foolish enough to pay an exorbitant 
price if he can get the object cheaper. And, on the other hand, the seller 
most anxious to dispose of his goods will take care not to sell them at a 



UTILITY THEORY OF EXCHANGE VALUE 191 

several persons prepared to sell coats, provided they can ob- 
tain a sufficiently high price. Suppose, furthermore, in order 
not to obscure the point at issue, that all these coats are of the 
same quality and that each prospective seller has but one coat 
to dispose of. Now it is evident that these possessors of coats 
do not all require the same inducement to part with their 
goods ; some will not give them up except for a high price, 
while others (who are perhaps in great need of money) will 
accept a very small price. Let us assume that: — 

A is willing to sell his coat for $10.00 

B is willing to sell his coat for 9.00 

C is willing to sell his coat for 8.00 

D is willing to sell his coat for 7.00 

E is willing to sell his coat for 6.00 

F is willing to sell his coat for 5.00 

G is willing to sell his coat for 4.00 

H is willing to sell his coat for 3.00 

I is willing to sell his coat for 2.00 

J is willing to sell his coat for 1.00 

On the other hand there are several persons contemplating 
the purchase of a coat. Not all of them are willing to make 
the same sacrifice to obtain one, but if they should find that the 
price is so low that the coat would be more useful than the 
money paid in exchange for it, they would not hesitate to 

price lower than is necessary. Therefore both of them await developments. 
They wait until the purchaser who is least anxious to buy has met and dealt 
with the seller who is least anxious to sell. These are the persons who, by 
virtue of their stronger economic position, determine the market price. They 
are called the "marginal pair." 

But, admitting the validity of this proof, we must remark that it results 
in the rather curious consequence that exchange value coincides in reality 
with the final utility of a commodity for none of the buyers and none of the 
sellers, except one of each ! This is indeed a case in which the exception is 
held to be more important than the rule. (This criticism is developed by 
Macfarlane, in his book on "Value and Distribution," Philadelphia, 1899.) 

Those who are curious to know how a subtle thinker juggles with these 
difficulties may consult Boehm-Bawerk's remarkable book on "Capital," 
which has been translated into English ; or a very complete summary of the 
theory in Smart's " Introduction to the Theory of Value." 



192 PRINCIPLES OF POLITICAL ECONOMY 

buy one. Not all will be willing or able to make the same 
sacrifice. Let us assume that : — 

K is willing, if necessary, to pay $8.00 

L is willing, if necessary, to pay 7.50 

M is willing, if necessary, to pay 7.00 

N is willing, if necessary, to pay 6.50 

O is willing, if necessary, to pay 6.00 

P is willing, if necessary, to pay 5.00 

Q is willing, if necessary, to pay 3.50 

R is willing, if necessary, to pay 3.00 

S is willing, if necessary, to pay 2.50 

T is willing, if necessary, to pay .50 

Now under these circumstances it is evident that neither A 
nor B will sell his coat, since the purchaser most eager to buy 
will not give more than $8.00. It is equally evident that T 
cannot expect to acquire a coat, since the seller most anxious 
to dispose of his coat will not accept less than $1.00. Con- 
sequently the market price will be somewhere between $8.00 
and $1.00. C is willing to sell his coat for $8.00, and K is 
willing to pay this price. Will the price therefore be $8.00? 
This is extremely unlikely, because there are seven coats on 
the market that can be bought for less than $8.00 each, and C 
will not pay $8.00 for what he can get for less. J, for ex- 
ample, will, if necessary, sell his coat for $1.00. Will $1.00 
therefore be the market price ? Again we must answer neg- 
atively, because there are nine persons willing to pay more 
than $1.00 for a coat, and only one coat available at that 
price. Will the price be $6.00 ? If it is, we shall have six 
coats available at this price, and only five purchasers. Will 
the price be $5.00? If so, we shall have six purchasers, and 
only five coats for sale. Therefore the price must be some- 
where between $5.00 and $6.00, perhaps $5.50. For at this 
price five coat-owners find it profitable to sell, and five intend- 
ing purchasers find it to their advantage to buy. 1 

1 If the price is $5.50, the man who would, if necessary, have sold his coat 
for $1.00 may be regarded as having achieved a gain of $4.50. The man who 
would, if necessary, have paid $8.00 may be said to have gained $2.50 by 



COST THEORY OF EXCHANGE VALUE 193 

(B) Let us now examine the labor or cost theory. This 
theory, which founds value on labor, at first seems to give a 
better explanation of exchange value. The current price of 
merchandise on the market appears generally to be regulated 
by the cost of production. Now what is the cost of produc- 
tion but the quantity of labor expended in producing a com- 
modity ? We must inquire, however, what is meant by 
quantity of labor. 

If quantity of labor means the duration of labor, or the 
amount of effort expended, measured by means of some sort 
of energo-meter, then this theory is disproved by facts, and 
is far from explaining them. Exchange value and price 
bear no necessary relation whatever to the time or trouble 
of production. (See page 59.) 

If quantity of labor means the sum of values expended in 
raw material, manual labor, etc., then this theory harmonizes 
with actual facts, but no longer explains anything. It simply 
amounts to the discovery that the value of the whole product 
is equal to the sum of the values of its parts, which is a 
self-evident truth. 

At all events we must not say, as is said so often, that 
value is determined by the cost of production. For we might 
just as well say, as opposed to this statement, that it is the 
value of things which determines their production and regu- 
lates the expenses that are necessary for this purpose. The 
art of the industrial manager consists precisely in foreseeing 
what the wants of men will be and what value men will 
attribute to certain things; he will so arrange and conduct 
production as not to expend more in producing goods than 
people will be willing to pay for them. If he is clever 
enough to expend less, he will reap a profit. If he unwisely 
expends more, he will lose; but the value of his product 

purchasing a coat at the market price. Indeed, each seller and each pur- 
chaser must gain something by the transaction at $5.50, else he would not 
exchange. These gains are sometimes called quasi-rents, because of their 
fundamental resemblance to the phenomenon of land-rent. 



194 PRINCIPLES OF POLITICAL ECONOMY 

will not be increased by so much as a single cent, if he suc- 
ceeds or if he fails. (See the section on Profit.) 

Hence there is here no necessary relation of cause and 
effect; that is to say, neither the cost of production nor value 
is the cause or effect of the other. We may simply say that 
under the pressure of an exterior cause, — competition, — and 
only where this pressure exists, the cost of production and the 
value of the product always tend to coincide. 1 This relation is 
one of the most important in political economy, but it does 
not by any means indicate the cause of value. 

1 In the original French edition of this book, Professor Gide remarks that 
in all cases of monopoly this relation between the cost of production and 
value no longer holds true. It must not be supposed, however, that mo- 
nopolies can or will arbitrarily put up prices. For if prices are exceedingly 
high, sales will be correspondingly small, and although the percentage of 
profit on sales will be large, the total profits will be small. As the interest of 
business concerns is to achieve the highest possible total profits, a monopoly 
will probably find it advantageous to lower prices so as to increase sales ; in 
fact, it will endeavor so to adjust prices as to obtain not the highest possible 
profit on each article sold, but the highest total profit on all goods sold. 

It may be suggested that perhaps the commodity in question is a necessity 
of life, and that consequently the monopolist is absolute ruler in this particular 
field of production. To this it may nevertheless be objected that there is no 
absolute necessity of life. Take bread, for example, or meat — both of which 
are regarded as types of necessities. If the price for these goods is exceed- 
ingly high, many persons will consume other articles of food, either because 
they are obliged to do so, or because they are not sufficiently fond of bread 
and meat to pay very high prices for them ; they would rather eat vegetables 
and fruit. 

There is, moreover, always a certain degree of potential competition, — 
competition which is sure to spring up if prices become extortionate, and 
which keeps prices within reasonable limits. In this sense, the pressure of 
competition is felt even by monopolies and trusts. (This point is discussed 
by J. A. Hobson, "The Evolution of Modern Capitalism," pp. 153 etseq., and 
by Collier, "The Trust," Chapter VI.) 

Even where the pressure of competition exists, however, we cannot say 
that value and cost of production tend to become absolutely equal, because 
under normal conditions there is a margin between the two which constitutes 
the profit of the manager. There are, to be sure, some economists who main- 
tain as a general principle that cost of production and value tend to become 
absolutely equal ; but they consider normal profit to be itself a part of the 
cost of production. 



CAUSES OF EXCHANGE VALUE 195 

In a word, we must conclude with regard to exchange 
value, as well as with regard to value in general (see page 64), 
that it is fruitless to seek a single cause or basis. The best 
way out of the difficulty, as Stanley Jevons and M. Vilifredo 
Pareto have proposed, is to remove the word " value " from 
the economic vocabulary and substitute the expression 
"exchange relation." It is indeed only a relation ; the causes 
of this relation are not so important as the conditions which 
it must fulfil. These conditions may be reduced to two, 
which together are necessary and sufficient : — 

(1) The current price must be such that demand and 
supply coincide exactly, for it is evident that there cannot 
be more merchandise sold than bought, nor, inversely, more 
bought than sold. 

(2) The current price must be such that all parties 
(sellers and buyers), even the least favored, secure a gain in 
utility. For it is evident that if there is not an advantage 
of some sort for both parties to an exchange, the transaction 
will not take place. 

The old and discredited formula of supply and demand, 
in spite of its commonplace appearance, possessed the merit 
of indicating very well the various elements of value, and 
especially the two predominating points that we have men- 
tioned. It explains clearly enough what M. Vilifredo 
Pareto has expressed in the much more scientific but more 
abstract formula : " Value arises from the contrast between 
tastes and obstacles." The supply is not only the quantity 
of goods obtainable in the market at a given time, but it 
must also take into account all the circumstances which (by 
facilitating production or rendering it more difficult) may 
vary this quantity. The demand is the intensity of the in- 
numerable and fluctuating desires for a given commodity. To 
say that value increases when the demand increases means 
that things are more desired when the need for them grows 
and the quantity remains the same. To say that value de- 
creases when the supply increases means that things are less 



196 PRINCIPLES OF POLITICAL ECONOMY 

desired when the quantity increases and the need remains the 
same. And this is a true statement of the facts. 



III. How Value is measured by Exchange 

As value is degree of desirability, to measure the value of 
a thing is to measure the intensity of the desire which that 
thing calls forth within us. But, it may be asked, is it 
possible to measure desires? Although not directly, it is 
certainly possible indirectly. All measures are simply com- 
parisons. Just as in determining the weight of an object, we 
compare the earth's attraction for it with the earth's attrac- 
tion for some other object, similarly we can measure the value 
of a commodity by comparing the attractiveness which it has 
for us with the attractiveness of some other object. 

It is true that to weigh or measure desires we have no 
scales or foot-rules ; but we do have a means that is no less 
accurate, viz., exchange. In every act of exchange, each party 
to the transaction is called upon to make a certain sacrifice to 
satisfy his desire ; in order to obtain what he wants, he must 
relinquish a certain quantity of the wealth he possesses. 
Now it is evident that the extent of the sacrifice made is 
a good measure of the intensity of his desire for the object 
obtained. When a South African Basuto pays ten oxen for 
a wife, is this not a proof that for him the woman is ten times 
as desirable as an ox ? 

[It is not customary in English to speak of our desire for 
things already in our possession ; when we have obtained 
them, we are no longer supposed to desire them, and desire 
is, in one sense, extinguished by possession. But it cannot be 
said that things are less desirable when we possess them than 
when we do not ; our feeling toward things may be just the 
same after possession as before, and our appreciation of them 
just as great. In this sense our desire attaches to things we 
own, quite as well as to things we wish to own. But our 
estimate of the desirability of an object often becomes clear 



THE MEASURE OF EXCHANGE VALUE 197 

and definite only when we contemplate giving it up. Hence 
we may be said to compare our desire for an object we possess 
with our desire for an object offered us in exchange for it.] 

Whenever we have a high appreciation of (or, if we may 
use the word in this peculiar sense, a keen desire for) an 
object we possess, it will take a large quantity of other 
wealth to induce us to part with it ; that is to say, a con- 
siderable amount of proffered wealth is required to arouse 
in our minds a desire opposed to that which leads us to re- 
tain possession, and sufficient to turn the scale in favor of 
the new desire. It is perfectly correct, therefore, to declare 
that the value of a tiling is measured by the quantity of other 
things for which it can be exchanged; or, more briefly, the 
value of a thing is expressed by its purchasing power. 1 

If, then, I can exchange an ox for ten sheep, I may say 
that the value of an ox is ten times that of a sheep ; or, 
inversely, that the value of a sheep is one-tenth that of an 
ox. This maybe expressed in the formula: The values of 
any two commodities are inversely proportionate to the quanti- 
ties exchanged. The greater the quantity of a commodity 
that I must relinquish in exchanging it for another, the less 
is its value as compared with the other commodity, and vice 
versa. Measuring values is exactly like weighing. When 
the two sides of the scales are on the same level, the weights 
of the objects are inversely proportionate to the quantities 
weighed. If we have to put ten sheep into one scale to bal- 
ance an ox in the other, this indicates that the weight of a 
sheep is only one-tenth the weight of an ox. 

IV. The Advantages of Exchange 

Whether exchange should be considered as productive is 
an old question for debate among economists. The physio- 

1 But we must not say, as is often said, that purchasing power constitutes 
value. Our desire alone constitutes value. Purchasing power is only an 
effect of value, just as the attractive power of an electromagnet is merely the 
effect of the current passing through it. 



198 PRINCIPLES OP POLITICAL ECONOMY 

crats answered it negatively. They even tried to prove that 
exchange could profit no one. For, said they, all exchange, 
if it is equitable, presupposes the equivalence of the two 
values exchanged, and consequently implies that there is 
neither gain nor loss on either side. It is true that one party 
may be cheated ; but in that case one man's profit is balanced 
by the other's loss, so that in any case the result is naught. 

This argument is purely sophistical, and was refuted by 
Condillac long ago. If exchange never led to profit, or if 
every exchange necessarily implied that some one had been 
cheated, it is difficult to understand why men have persisted 
for so many centuries in carrying on exchange. In reality, 
whatever I yield in exchange for something else is always 
less useful for me, less desirable, and hence worth less, than 
the thing I acquire. Otherwise I should not give it up. 
The person who exchanges with me pursues exactly the same 
line of thought. Each of us thinks that by the exchange 
he receives more than he gives ; and however strange this 
may appear, we are both right. In our different opinions 
regarding the value and desirability of things, there is no 
contradiction. Do we not know that the utility of all things 
is purely subjective, and that it varies according to the wants 
and desires of each person? (See what we have already said 
with regard to Utility, page 52.) 

Without continuing the discussion of these subtle distinc- 
tions, we shall state briefly the advantages of exchange from 
the practical point of view. 

(1) Exchange enables us to utilize, in the best way possi- 
ble, a large quantity of wealth lohich without exchange would 
remain unused. Without exchange, what would England 
do with her coal, California with her gold, Peru with her 
guano, Brazil with her cinchona bark? When analyzing the 
notion of wealth, we found that an indispensable condition 
of any object ranking as wealth was its capability of being 
utilized. And in order that this may be effected, the article 
must be conveyed by means of exchange to the person who is 



ADVANTAGES OF EXCHANGE 199 

to use it — the quinine to the fever patient, the guano to the 
farmer, the coal to the manufacturer. Suppose that exchange 
were suppressed everywhere, and that all persons and all 
nations were obliged to keep all the wealth they possess. 
What an enormous mass of wealth would thus be condemned 
to remain useless, and doomed to destruction ! Not only 
must we say that without exchange the greater part of 
wealth would not be used, but we must add that it would 
never have been produced. 1 

In other words, we must regard exchange as the last of the 
series of productive acts that begins with invention (which 
is also an immaterial act) and continues throughout the 
whole list of agricultural, manufacturing, and transporting 
industries, bringing products step by step nearer to their 
final destination, which is, to come into the possession of the 
persons who will use them. These steps are changes of 
form, changes of place, and changes of ownership - — all three 
of which are equally indispensable to the attainment of the 
final result. 

(2) Exchange enables us to utilize in the best way a host 
of productive capacities which without exchange ivould remain 
inactive. If there were no such thing as exchange, each man 
would be compelled to produce all that is necessary to supply 
his wants. If his wants were ten in number, he would have 
to ply ten different trades. Whether he did this well or 
not would not alter the facts of the case ; he would be 
obliged to regulate his production not according to his apti- 
tudes, but according to his wants. With the introduction of 
exchange, however, the state of affairs is completely changed. 
Every one is then sure of obtaining by exchange just what he 

1 Might one not object that exchange, although indispensable under a sys- 
tem of private property, would under a system of communism no longer have 
any reason to exist, and would therefore disappear ? We must reply that 
even under a communistic system the producer is not the same as the con- 
sumer, and it would therefore be necessary for things to change hands. 
Turning things into a common store from which each member of society 
takes that which he needs, is also a kind of exchange. 



200 PRINCIPLES OF POLITICAL ECONOMY 

needs ; every one, moreover, devotes himself to the produc- 
tion of those things that he can produce best. He regulates 
his production not according to his wants, but according to 
his aptitudes or his means. Before the era of exchange, 
everyone was obliged to produce what he needed most; now 
every one devotes himself solely to the production of what- 
ever he can most easily produce. This is a most important 
and wonderful progress. 

It may be said that these advantages of exchange greatly 
resemble those afforded by the division of labor : and, in fact, 
they are the same, only greatly increased and multiplied. If 
there were no exchange, association and division of labor 
would require a previous agreement among those who are to 
work in harmony. What would be the use of the most per- 
fect division of labor in an immense factory producing (let 
us say) hats, unless other persons were simultaneously pro- 
ducing food, shoes, houses, etc., to exchange for these hats ? 
Exchange dispenses with the necessity for a preliminary 
agreement, and thus enables the division of labor to extend 
beyond the narrow circle of the home and the workshop, and 
spread over the whole industrial community, reaching even 
to the extremes of the earth. Under a system of exchange, 
each man — no matter where he may be — produces according 
to his natural or acquired aptitudes and according to the 
facilities offered by the region which he inhabits ; he devotes 
himself entirely to one kind of labor, and always puts the 
same product on the market, with a certainty that the in- 
genious arrangements which we are about to describe will 
permit him to receive in exchange any other objects that he 
wants. It has often been remarked that the things which 
any one of us consumes in a day, are the combined result of 
the toil of hundreds or perhaps thousands of workers who 
are united one to another by invisible but none the less real 
bonds of association. 1 

1 It is said that Mr. Carnegie, at a dinner which he gave to the members 
of the Pan-American Congress in 1890, remarked with some pride, "Almost 



HISTORY OF MERCHANTS 201 

V. The Means of facilitating Exchange 

Exchange would be very difficult — almost impossible — 
had not ingenious means been contrived for simplifying and 
facilitating it. These means of exchange may be classified 
as follows : — 

(1) The formation of a class of middlemen called merchants 
or traders, and the rise of various processes that have been 
devised for bringing producers and consumers together. 

(2) The creation and improvement of means of transporta- 
tion designed to facilitate the conveyance of commodities. 

(3) The invention of a commodity called money, designed 
to serve as a go-between in exchange, and enabling us to 
divide barter into sale and purchase. 

We shall say but a few words regarding the first two of 
these institutions ; the third, because of its importance, will 
require several pages. 

VI. History of the Part played by Merchants 

Contrary to what we might be disposed to believe, com- 
merce or exchange did not first take place among neighbors 
and then extend wider and wider in its scope. The mem- 
bers of the same family or clan are entirely too much alike 
in wants and in habits to permit of any diversification of 
desires or products ; the division of labor among them is too 
slightly developed to give rise to regular exchange relations. 
When each member of the family or clan (or. even when each 
family or clan as a whole) produces the same things, how can 
there be any interchange of goods? Exchange was as a mat- 
ter of fact first practised among peoples and regions far dis- 

the whole world has helped to provide the dinner which will be served to 
you." Doubtless this was true. But the same thing is also true of a poor 
man's dinner. As M. de Laveleye has well said : " The poorest laborer con- 
sumes the products of the two hemispheres. The wool for his clothes comes 
from Australia, the rice in his soup from India, the wheat in his bread from 
Illinois, the oil for his lamp from Pennsylvania, his coffee from Java." 



202 PRINCIPLES OF POLITICAL ECONOMY 

tant and different from each other. Diversity of products 
and customs resulted from diversity of natural environment. 
Commerce, therefore, was international before it became 
local. It was maritime before it became overland. The first 
merchants or traders were sailors or adventurers, such as we 
read about in the travels of Marco Polo, or in the imaginary 
journeys of Sinbad the Sailor in the "Arabian Nights." 

As commerce was originally carried on only with foreigners 
(or, as the two terms were originally synonymous, with 
enemies), it was at the beginning accompanied by fraud, 
stratagem, and frequently by violence. It was not strange, 
therefore, and seemed to cause no public concern, that Mer- 
cury was regarded as the patron deity both of merchants and 
of thieves. 

At the beginning, moreover, merchants were persons of 
great note, men who were envied and feared, ranking higher 
than artisans or farmers, and constituting a veritable aristoc- 
racy. Trade or commerce on a small scale, and particularly 
retail trade such as exists to-day, is of comparatively recent 
origin. 

In .the evolution of trade or commerce two stages may be 
noted : — 

(1) The first stage is that of the travelling trader. All the 
countries in which commerce is as yet little developed may be 
regarded as still in this stage ; trade is carried on by means 
of caravans and travelling bands. This condition survives in 
our smaller towns, where pedlers and hucksters carry their 
goods about in quest of customers. 

But the system of itinerant traders is impossible except 
for goods that can be easily transported; it is, moreover, a 
costly method, because the expenses it involves are, compared 
with the value of the goods and the amount of sales, exceed- 
ingly high. The profits of traders who conduct caravans 
across Central Africa must reach at least four hundred per 
cent in order to be regarded as worth while. 

(2) Therefore, whenever commerce attains any develop- 



SERVICES OF MERCHANTS 203 

ment, the travelling trader soon gives way to the sedentary 
trader or shopkeeper. Formerly, the trader sought his cus 
tomer; now, the customer must find the trader. But the 
trader endeavors to attract the attention of purchasers by 
means of signs (which originally were of the same nature as 
the barber's pole in front of his shop, or the wooden Indian 
that, until quite recently, stood before most tobacco shops) , 
or show-windows, exposing to view the goods themselves in 
the most enticing arrangement ; or even by means that are 
designed to attract customers from afar, — such as advertise- 
ments, circulars, catalogues, or commercial travellers. These 
commercial travellers, or " drummers," differ from the travel- 
ling traders of previous epochs in that they carry samples 
with them instead of the goods themselves. 

The advantages that society derives from the existence of 
traders are these : — 

(1) They serve as intermediaries, or middlemen, between 
the producer and the consumer, and save the time each of 
them would be required to waste in seeking the other. 

(2) They buy goods in large quantities, i.e. wholesale, 
from the producer, and sell them in smaller quantities, i.e. 
retail, to the consumer or smaller dealer, and thus obviate 
the embarrassments which inevitably would result from a 
difference between the quantity offered by the producer and 
that desired by the consumer. 

(3) They keep merchandise in stock, and thus prevent the 
difficulties which might result from the fact that the producer 
rarely wants to sell goods at exactly the time the consumer 
wants to buy. 

These are, no doubt, important services rendered by mer 
chants or intermediaries, but we must inquire how much they 
cost to society. It must be admitted that for various reasons, 
chief among which is the small amount of labor involved in 
trading and the attraction it therefore has for many people, 
the actual number of middlemen, and of retail traders (shop- 
keepers) in particular, has far exceeded the number really 



20-i PRINCIPLES OF POLITICAL ECONOMY 

needed. The multiplication of middlemen must of course 
result in a proportionate decrease in the average amount of 
business done by each of them. Hence, as the number of 
sales made by each is reduced, the price of each article is 
loaded with excessive general expenses, and it often happens 
that although the wholesale price of the goods sold by re- 
tailers falls considerably, there is no corresponding fall in 
retail prices. In this wise, middlemen tend to become veri- 
table social parasites. 1 

When in addition to this we consider the frequent adul- 
teration of goods, which has recently become a peril to 
public health, 2 and the untruthful advertisements which 
are also a result of keen competition among tradesmen, we 

x As it is difficult to obtain figures illustrative of the growth of trading 
classes in this country, it is necessary to quote the French statistics on this 
point. 

In 1866 the number of traders in France (" commercants " ) was 858,312, 
and in 1896 it was 1,492,921. This is an increase of 74 per cent in thirty 
years. If this rate of increase should continue, the whole population of 
France would be traders in two hundred years. 

A typical example of the increase in the number of shopkeepers in France, 
and one frequently quoted by French economists, is that of bakers. Thirty 
years ago there was in Paris one bakery for every 1800 inhabitants. To-day 
there is one for every 1300. In Lyons there is one for every 500, and in 
St. Etienne one for every 380 of the population. What is the result ? 
Bread is sold at a price 40 per cent above the normal cost of production, 
that is, above the price for which cooperative societies sell it. For bread 
alone, the useless multiplicity of middlemen costs the French population 
sixty to eighty million dollars per annum ! If we multiply these figures by 
the number of equally important articles of consumption in which middlemen 
deal, we will have some idea of the enormous tribute which a nation may be 
obliged to pay to the trading classes. The total amount would probably 
reach twice that which is paid to the government in taxes. Socialists -and 
classical economists alike condemn this defect of our social organization. In 
1822 Fourier denounced and foretold, with a vigor and an exactitude that 
have never been surpassed, the abuses to which our social organization would 
give rise in this respect. 

Professor Leroy-Beaulieu has given an interesting discussion of this sub- 
ject in his large " Economie politique." 

2 Undoubtedly the adulteration of food, false weights, and deceit in com- 
merce are not exclusively characteristic of our own times. The writings of 



SUBSTITUTES FOR MIDDLEMEN 205 

must ask whether the services rendered by these intermedi- 
aries are not too dearly paid nowadays, and whether we 
cannot devise some other method of organizing exchange — 
a method that will be less costly and less dangerous for 
society. 

Clearly the most effective remedy would be to put pro- 
ducers and consumers in direct relations with each other, 
and thus dispense with middlemen, or at least reduce their 
numbers to a minimum. 1 

The great difficulty consists in the fact that the producer 
cannot very well sell at retail, in small quantities, and the 
consumer is even less able to purchase wholesale. The 
attempt is now being made to overcome this difficulty by 
means of two kinds of association; namely, the association 
of producers who agree to sell to the public directly (for ex- 
ample, agricultural syndicates such as are mentioned in the 
footnote on page 168), or the association of consumers who 
agree to buy directly of the producers {cooperative societies 
for consumption, which we shall describe in Book V). 

Therefore it is not impossible that the day will come when 

the prophets of Israel are full of imprecations upon the merchants of Tyre 
and Sidon. The medieval guilds also found it necessary to forbid these 
practices. But it may be said that the great increase in the number of 
traders has aggravated this evil by obliging middlemen to lower prices in order 
to attract customers. 

The adulteration of foods has become so serious a problem that most coun- 
tries have legislated against it. Congress has recently (December, 1902) 
passed a "pure food law" defining and punishing food adulteration. 

J Long ago, even before the class of traders had originated, producers and 
consumers met together at the markets or fairs which were formerly of great 
importance, and which still are found in rural districts or sparsely populated 
countries. But we could not think of returning to such a system as that. 
It would be more costly than the merchant class, because of the loss of time 
and the cost of transportation. Hence fairs and markets are losing their 
importance nearly everywhere. Yet in countries where improved methods 
of exchange are unknown, fairs are still important ; the fair of Nijni-Novgo- 
rod, in the extreme eastern part of Europe, transacts business to the amount 
of $80,000,000 annually, and brings together between 200,000 and 300,000 
people from all parts of the old continent, 



206 PRINCIPLES OF POLITICAL ECONOMY 

there will be no more traders. It may perhaps seem that 
such a change would be tantamount to a return to former 
conditions, as it would lead us back to the primitive system 
by which producers and consumers exchange directly. But 
with regard to such apparent retrogressions as this, we must 
refer the reader to what will be said later concerning money 
and credit. 

VII. The Means of Transportation 

We may easily conceive of exchange without the displace- 
ment of matter ; for instance, when we exchange immovable 
objects, such as land or buildings, or, better still, when 
exchange takes the form of pure speculation in commodities. 
Nevertheless, change of place may be regarded as an essential 
feature of that particular form of exchange to which both 
custom and legal phraseology confine the name of commerce. 
Now change of place, or transportation, requires labor, and 
consequently involves cost. Every invention which facili- 
tates transportation also aids exchange ; hence the history 
of commerce is in a measure identical with the development 
of transportation on land and on sea. 

The difficulties of transportation are of various kinds, and 
due to several conditions, among which the following may 
be distinguished : — 

(1) Distance. Man's genius cannot do away with dis- 
tance. He cannot reduce the space that separates two parts 
of the earth. But practically the obstacle of distance is con- 
verted into one of time, and human ingenuity has been singu- 
larly successful in reducing the time necessary for traversing 
a given distance. The first stage between New York and 
Philadelphia, set up in 1756, made the run in three days. It 
was, even after the Revolution, quite an achievement to make 
the trip between New York and Boston in six days. 1 It is 

1 In 1766 it was announced that a conveyance described as the Flying 
Machine, " being a good wagon, with seats on springs, 1 ' would perform the 
whole journey between New York and Philadelphia in the surprisingly short 



MEANS OF TRANSPORTATION 207 

no exaggeration to s?ij that we can now travel twenty times 
as fast as the founders of the nation ; and we are perfectly 
justified in saying, therefore, that the size of the country has 
been reduced to one four-hundredth of what it then was 
(since surfaces vary in proportion to the squares of the 
radii). This remarkable change has been brought about by 
railways and steamboats, which have had the same effect as 
an astounding reduction of the earth's area. 

(2) The nature of commodities. Cattle are not so easily 
transported as vegetables, nor vegetables so easily as coal, nor 
coal so easily as gold. Weight, danger of injury or of break- 
age, perishability or difficulty of preservation, are hindrances 
to transportation. But they may be partly overcome by 
rapidity of conveyance. In the days of sailing vessels, cattle 
or meat could not have been sent safely from America to 
Europe. This can be done to-day, thanks to the short dura- 
tion of the trip. Formerly, it was impossible to send fish, 
fresh fruit, or game, from one part of the Union to another. 
Now this is done daily, and requires but a few hours. 
Besides quick conveyance, several recent inventions have 
helped overcome the obstacles in the way of transportation. 
Among these are the refrigerating process which permits 

time of two days. In his recollections of the revolutionary period, Samuel 
Breck describes how, by getting up at three or four o'clock in the morning 
and prolonging the journey until late at night, he used to make the trip from 
New York to Boston in six days, after a series of mishaps and accidents such 
as would suffice for an emigrant train crossing the plains. 

Ocean travel then was scarcely known. In the time of Washington it 
was no uncommon occurrence when a vessel was nine, ten, or eleven weeks, 
or even three months, on a voyage from Havre to New York. In 1795, and 
for a number of years after, a man who had been abroad was pointed out in 
the streets of even large cities. (See McMaster, " History of the People of 
the United States," Vol. I, Chapter 1.) 

Comparing present conditions of passenger transportation with those 
above described, we find that the trip from New York to Philadelphia is now 
made by express trains in about two hours, and from New York to Boston 
in less than seven hours. The time required a hundred years ago to travel 
from Boston to New York is now sufficient to go from the Atlantic to the 
Pacific coast. 



208 PRINCIPLES OF POLITICAL ECONOMY 

the exportation of fresh meat from Australia to Europe ; 
chemical processes used for the preservation of food; and 
perfected methods of canning. In spite of all these improve- 
ments, however, the difficulty of transporting certain objects, 
particularly meat, even now has economic consequences that 
are important and sometimes disastrous. 

(3) The nature and condition of roads. This is the most 
serious obstacle of all; but it is also the one that human 
industry has coped with most successfully. 

By sea, there is no need to build a road ; the sea will bear 
any weight, and the horizontal level permits of motion in 
any direction. The weakest motive force, and, if we use the 
wind, a gratuitous one, is sufficient to propel enormous 
masses. It is not surprising, therefore, that the sea has 
always been the highroad of commerce, and that countries 
separated by a thousand miles of sea are really nearer than 
others divided by a hundred miles of land. 1 Even now, 
despite the wonderful progress of overland carriage, trans- 
portation by water is much less difficult and costly than 
transportation by land, i.e. it requires less labor. 2 

On land, the difficulties are greater. The broken and 

1 More freight is carried between different countries by water than by 
land ; in some countries, as in Russia and China, more is carried by water 
than by land even within the borders of the nation. As the saving of time 
is of great moment in transportation, steam has usually superseded sails in 
transportation over waterways. 

Columbus, in 1492, was seventy days in crossing the Atlantic from Spain 
to the Bahamas; modern ocean "greyhounds" have reduced the record 
between Sandy Hook and Queenstown to less than five and a half days. 
Goods are often placed on the shelves of Chicago stores within ten days after 
leaving France. 

2 Larger ships and better machinery have reduced freight rates for trans- 
portation by water, and thus increased the natural advantage of economy. 
One pound of coal now supplies nearly three times as much steam-power as 
in 1875. A bushel of wheat is delivered at Liverpool from the North Dakota 
wheat-fields at a little over twenty cents. At Marseilles the English coal 
which has come through the Strait of Gibraltar and has travelled nearly 
2000 miles, is sold cheaper than the coal from the Grand-Combe mines (in 
France), which are only 110 miles off. 



ROADS 209 

uneven surface of our planet scarcely permits transporting 
goods without artificial roads. 1 Carriage by men (as is usual 
in Africa), or by beasts of burden (as in Central Asia), can, 
if necessary, dispense with the need for roads ; but transpor- 
tation by means of vehicles cannot. Now road-building is 
a costly matter, and the better the road the more it costs. 
Railroads are the most perfect roads for their purpose, but 
they are exceedingly expensive. In Europe the average cost 
of railroads, including equipment, is about $115,000 per mile ; 
but it varies greatly, according to the natural obstacles that 
must be overcome and the cost of labor and material employed 
in construction. The average cost per mile for road and 
equipment in the United States is about 150,000, in Germany 
it is about $120,000, in France $130,000, and in England 
considerably more. Even where a railroad can be built at 
the least cost, about $20,000 per mile must be expended. 2 
Therefore the construction of railroads requires an enormous 
amount of capital, on which interest must be paid by the 

1 Improvement in the means of transportation is illustrated by a multi- 
tude of modern contrivances : macadamized roads, railways, bridges, tun- 
nels, regular sea routes which best utilize winds and currents, canals, the 
wonderful invention of the wheel, steel vessels, steam-engines, and locomo- 
tives. All these improvements and devices may be classified under three 
heads : those that concern the road or route ; those that concern the vehicle 
employed ; and those that concern the motive power used. 

2 The railroad mileage of the world at the end of 1900, according to the 
" Archiv fur Eisenbahnwesen," was 490,962, costing nearly $39,000,000,000 ; 
whereas in 1830 there were less than 800 miles. The United States, which 
in 1870 had little over 50,000 miles, now possesses nearly 200,000, i.e. more 
than a two-fifths of the world's mileage and more than all of Europe. Over 
1,400,000 freight cars and 27,000 passenger cars are now running on the 
railroads of this country, which employ over a million persons, and whose 
net annual earnings are over 1500,000,000. 

According to the report of the United States Commissioner of Navigation for 
1901, the world's merchant marine includes 40,556 vessels with a total ton- 
nage of 31,498,847. This calculation included only steamers of over 100 
net tons and sailing vessels of over 50 net tons ; of the total thus obtained 
12,702 were steamers with a total gross tonnage of 23,379,726. 

Besides the means of transportation, it is interesting to note the develop- 
ment of telegraphy, which is scarcely less indispensable to modern exchange. 



210 PRINCIPLES OF POLITICAL ECONOMY 

transporters of goods and by passengers. Nevertheless, if 
there is sufficient traffic, there is great economy in transpor- 
tation by rail, to say nothing of its regularity, convenience, 
and rapidity. 

The cost of transportation by wagon varies from 6 to 10 
cents per mile for hauling a ton of freight over the best 
roads, and is as high as 25 cents or more over very poor 
roads. The average price per ton for a mile of carriage on 
the trunk railroads of the United States has declined in 
the past thirty years from about 2 cents to 6 mills, and 
on two of them to 3.6 mills. 1 These comparatively low 
rates are not surprising when we reflect that to do the work 
of a locomotive attached to a freight train, we should require 
on an ordinary road at least three hundred horses, and that 
they would travel ten times more slowly. 

VIII. The Division of Barter into Sale and Purchase 

When exchange is carried on directly, commodity for 
commodity, it is called barter. But it is an inconvenient 
and almost impracticable operation. In fact, for barter to be 
successfully effected, A, the possessor of an object, must find 
some other person, B, who wants to obtain that object, and 
who possesses and is disposed to yield the very object desired 
by A. Nor is this all. Even if these two persons actually 
find each other, they must have two exchangeable objects of 
equal value, i.e. objects which correspond to equal and inverse 
desires. It is easy to see that all these conditions are but 
rarely fulfilled. 2 

According to R. E. May ( " Die Wirthschaf t in Vergangenheit, Gegenwart und 
Zukunft," Berlin, 1901) the world's telegraphic lines measure over two million 
miles, i.e. eighty times the earth's circumference. The number of messages 
transmitted in the United States in 1902 was about 90,000,000. 

1 The average rates on the New York canals have declined from 6.5 mills 
per ton mile to 1.9 mills. The present average canal rates are one-third that 
of most railroads. The average cost of transportation on the Great Lakes is 
about .6 mill per ton mile, and on the largest ocean freighters about .5. 

2 Lieutenant Cameron tells what trouble he had in buying a boat when 



SALE AND PURCHASE « 211 

The invention of a third commodity to serve as a go-between 
removes the difficulties encountered by barter. It evidently 
involves an express or tacit understanding, among men living 
in society, by which each person agrees to accept this third 
commodity in exchange for his goods. Once this under- 
standing is reached, exchange transactions are readily effected. 
Suppose that silver be selected as the commonly accepted 
third commodity in all exchanges. Then, for the commodity 
that I have produced and wish to dispose of, I will accept 
a certain amount of silver, although I may have no use for 
it. I do this because I know that when I wish to acquire 
anything I want, all I shall have to do is to offer its pos- 
sessor a certain amount of silver ; he will accept this silver 
for the same reasons that led me to accept it. 

It is evident, then, that every exchange transaction can be 
divided into two separate and distinct operations. Instead 
of exchanging my commodity A for your commodity B, I 
exchange A for silver and then exchange this silver for B. 
The first of these exchange operations is called sale, and the 
second, purchase, — at least whenever the intermediary com- 
modity is money properly so called. We appear, therefore, 
to have complicated rather than simplified exchange, inasmuch 
as two operations are now necessary instead of only one. 
But a straight line is not always the shortest road between 
two points. This ingenious roundabout method does away 
with an incalculable amount of trouble and loss of time. 

Barter, as we have explained, is made impracticable by sev- 
eral circumstances. It requires, as we have already pointed 
out, that the producer, A, shall meet some other person, B, 

travelling in Africa: " Syde\s agent wished to be paid in ivory, of which 
I had none ; but I found that Mohammed Ibn Salib had ivory and wanted 
cloth. Still, as I had no cloth, this did not assist me greatly until I heard 
that Mohammed Ibn Gharib had cloth and wanted wire. This I fortunately 
possessed. So I gave Ibn Gharib the requisite amount in wire ; whereupon 
he handed over cloth to Ibn Salib, who in his turn gave Sycle's agent the 
wished-for ivory. Then he allowed me to have the boat." — Verne y L. 
Cameron, "All Across Africa," Vol. I. 



212 PRINCIPLES OF POLITICAL ECONOMY 

who is inclined to acquire at once the particular object that 
A has to dispose of; it is necessary, furthermore, that B 
shall possess, and be willing to relinquish, the very object 
that A seeks to obtain. But with money as the medium of 
exchange, the producer A, although he has still to find some 
one who wants his commodity, no longer requires the pur- 
chaser to offer the commodity that he, A, wants. A will 
obtain from some other person, at some other time and place, 
the commodity that he wants. It is the inseparability of 
these two operations in barter that made them very diffi- 
cult ; but when the tie that unites them is broken, each of 
them separately becomes comparatively simple. It is not 
very difficult to find a buyer, i.e. some one who wants your 
commodity. It is even less difficult to find some one who is 
willing to sell you the commodity you want. 

But we must not forget that although these processes are 
henceforth separated, they nevertheless continue to form a 
whole, and that the one cannot be conceived without the 
other. In our everyday life we are too apt to imagine 
that sale and purchase are independent and self-sufficient 
processes. That is a mistake. Every purchase means a 
prior sale ; for before being able to exchange money for goods 
we must previously have exchanged goods for money. In- 
versely, every sale points to a future purchase ; for if we ex- 
change goods for money, we do so only in order that we may 
have this money to exchange for other goods. What else 
could we do with it? Still, as money can be kept for an in- 
definite period without being used, a long interval may elapse, 
— perhaps several years or even several generations, — be- 
tween the sale and the complementary t purchase. But in 
thought these two operations must be connected. Despite the 
interposition of a medium of exchange and the complication 
it introduces, every man in modern as well as in primitive 
society lives by exchanging his products or services for the 
products or services of others. 



CHAPTER II — METALLIC MONEY 

I. The History of Money 

The function of medium of exchange has not been assigned 
to any particular object by the terms of an express agreement 
among men, but because certain objects forced themselves 
upon men's choice by reason of the peculiar qualities which 
fitted them for this important service. 

The difficulties of barter (see page 210) obliged men to 
choose an intermediary commodity to play a part in every 
exchange. They naturally chose a commodity that was 
familiar to them, and that they regarded as most generally 
useful. For primitive societies the most universally useful 
commodities were probably rude implements of hewn stone. 
In patriarchal societies cattle appear to have been the cur- 
rent "money" or intermediary commodity. Indeed, many 
Indo-European languages use the same term to designate 
cattle and money. 1 

According to circumstances, many other commodities have 
served as the medium of exchange ; for example, rice in 
Japan, packages of tea in Central Asia, furs in the Hudson 
Bay territory, salt and colored calico in Central Africa. But 
one class of objects, viz., the metals gold, silver, and copper, 
from early times attracted man's attention in all civilized 
societies, and soon took the place of every other commodity 
as a suitable intermediary in exchange. 

By virtue of chemical properties which make these metals 
comparatively unchangeable, they are furnished by nature in 

1 The most familiar instance of this is the Latin word pecnnia, which 
originally meant cattle or herd. Even in Homer values are estimated in 
"oxen." 

213 



214 PRINCIPLES OF POLITICAL ECONOMY 

a relatively pure state, — gold purer than silver, and silver 
purer than copper. Hence they were known and used long 
before a knowledge of metallurgy enabled men to use other 
metals, such as iron. It is a singular coincidence that the 
old legend of the four ages of mankind, — the ages of Gold, 
Silver, Bronze, and Iron, — places these four metals precisely 
in the order in which man must have become familiar with 
them. The physical properties of gold and silver, — lustre, 
bright color, malleability, etc., — which are by no means com- 
mon and which soon led men to seek them either for orna- 
ment or for industrial purposes, easily account for the 
important part they have played at all times and among all 
peoples. 

These natural properties involve economic consequences of 
the greatest importance, which give the precious metals a 
marked superiority over all other commodities. These prop- 
erties are : — 

(1) Facility of transportation. No other objects have so 
great a value in so small a weight. A man cannot con- 
veniently carry on his back more than sixty pounds. Now 
sixty pounds of coal are worth less than 20 cents ; the same 
weight of wheat is worth about 60 cents ; of refined sugar, 
82; of cotton, 84 ; of copper, 88; of ivory, 8130 to 8150; 
of raw silk, 8250 ; of silver, 8500 ; of fine gold, 818,000. 

The importance of this quality of precious metals is much 
greater than at first sight appears. It is plain that if we 
could do away with the difficulty of transportation for any 
commodity, if a mere word could transfer it instantaneously 
from one place to another, and if, therefore, the whole world 
formed but one market for this commodity, the result would 
be that its value would everywhere be exactly the same. 
(See page 207.) Suppose for a moment that its value 
were lower in one place than in another. Then it would 
immediately be transported from the first to the second 
place ; and as transportation, according to our hypothesis, 
offers no difficulty and no expense, the slightest difference 



HISTORY OF MONEY 215 

would suffice to make transportation profitable. Hence the 
difference of value supposed to exist could not continue ; the 
original equilibrium would be reestablished at once, just as 
water, whenever it has been agitated, immediately seeks its 
lowest level. 

Now as precious metals are of all commodities, except 
precious stones, those which have the greatest value in the 
smallest volume, they are also the commodities that may 
most easily be transported ; their value, therefore, most 
rapidly tends to become uniform. For 1 per cent of its 
value (freight and insurance included) gold or silver can be 
conveyed from England to a Chinese port, whereas the 
transportation of the same weight of wheat would cost, 
according to the distance, 20, 30, or even 50 per cent of its 
value. It might seem to follow that, except for this one 
per cent, the value of the precious metals must be the same 
the world over. Yet such a conclusion is erroneous ; for the 
value of the precious metals is in fact not the same every- 
where. In mining districts, where these metals are produced, 
their value is somewhat lower than elsewhere. This explains 
the incredibly high prices formerly charged for goods in Cali- 
fornia, and now paid in the Transvaal. Nevertheless, we 
may say that the value of these metals satisfies fairly well 
the first condition of a good measure of values, viz., invaria- 
bility from place to place. 

(2) Unlimited durability. By virtue of chemical proper- 
ties that make rusting, decay, corrosion, or disintegration 
impossible, gold and silver may be kept unchanged for an 
indefinite period. No other wealth is so durable. Animal 
and vegetable products decay, and even some metals, such as 
iron, oxidize and crumble into dust. 

This characteristic is almost as important as the first. It 
has the same effect with regard to time as the preceding has 
with regard to place, inasmuch as it insures at least a rela- 
tive invariability of value from one period to another. Be- 
cause of this durability, by virtue of which the same molecules 



216 PRINCIPLES OF POLITICAL ECONOMY 

of metal may be coined and recoined, and thus last century 
after century, the precious metals are little by little accumu- 
lated in large quantities. The annual production of these 
metals, compared with the immense permanent accumula- 
tion of gold and silver, is as unimportant as a river compared 
with the ocean. As the accumulation increases, accidental 
variations in the annual production of gold and silver make 
less perceptible differences in the total amount. Any sudden 
increase in the volume of a river which runs into a small lake 
causes a considerable rise in the level of the lake ; but the 
highest tides of the Rhone River, for example, raise the level 
of Lake Geneva only a few inches. 

How different from the precious metals is wheat ! It is 
not durable, and can be used only once. When each annual 
harvest takes place, the barns in which last year's crop was 
stored are already nearly empty. If the wheat crop in a par- 
ticular year were doubled throughout the world, the large 
supply would cause a calamitous fall in prices. But if the 
output of our gold and silver mines were doubled in any one 
year, the effect would be trifling, because the annual product 
represents such a small fraction of the total existing supply. 
Yet variations in the output of precious metals may in the 
long run become perceptible. If the rate of annual increase 
were 5 per cent of the supply, the stock of gold and silver 
would be doubled in about fifteen years. Therefore, although 
the value of these metals offers a satisfactory guarantee of 
stability when only short periods of time are taken into con- 
sideration, it is far less satisfactory when we consider longer 
periods. This variability gives rise to some of the grave 
disadvantages which we have already pointed out- 

(3) Identity of quality. As the precious metals are what 
the chemists call elements, they are always identical ; that is 
to say, one piece of pure gold is like every other piece of 
pure gold. An experienced merchant can distinguish Odessa 
wheat from California wheat, or a tuft of Australian wool 
from wool grown on a Spanish merino ; but the most skilful 



HISTORY OF MONEY 217 

goldsmith, with the aid of the most powerful reagents, can 
find no difference between Australian gold and gold from 
the Ural Mountains. There is no need for "samples" of 
gold. 

(4) Difficulty of counterfeiting. The precious metals, be- 
cause of their characteristic color, weight, and metallic ring, 
may be recognized by the way they look, the way they feel, 
and the way they sound ; no other substances are likely to be 
mistaken for them. 

(5) Perfect divisibility. By divisibility we do not mean sim- 
ply the property of being readily drawn into threads or beaten 
into thin sheets, — for gold and silver are wonderfully ductile 
and malleable, — but economic divisibility as well. Dividing 
an ingot into a hundred parts does not alter its value in the 
least ; the value of each fragment is exactly proportionate to 
its weight, and the value of all the fragments put together is 
exactly that of the original ingot. 1 

To use the precious metals as an instrument of exchange is 
one thing; to employ them as money, in the strict sense of 
the term, is another. 2 The use of the precious metals as 
money has an interesting history, extending through several 
distinct stages : — 

(a) First the precious metals were used in the shape of 
crude ingots. In every exchange transaction these ingots 

1 Precious stones are superior to the precious metals in the first of the 
above requirements, viz. , great value in small bulk, but in all the other re- 
quirements they are inferior : they are by no means uniform in quality, they 
can be successfully imitated, and they cannot be divided without losing a 
large part of their value. 

Jevons, in his classical little book on " Money and the Mechanism of Ex- 
change," enumerates seven qualities which the material of money should 
possess : 1, Utility and value ; 2, Portability ; 3, Indestructibility ; 4, Homo- 
geneity ; 5, Divisibility ; 6, Stability of value ; 7, Cognizability. 

2 In the first chapter of his " Monnaies et Medailles," Lenormant says: 
"Great and powerful empires like those of Egypt, Chaldsea, and Assyria, 
passed thousands of years in wealth and prosperity, with as extensive com- 
mercial relations as any nation of antiquity ; they constantly employed the 
precious metals in business, but were absolutely ignorant of their use as 
money." 



218 PRINCIPLES OF POLITICAL ECONOMY 

had to be weighed and assayed. The legal forms of ancient 
Roman law, such as mancipatio and libripens, remind us of 
the days when the instrument of exchange, whether silver or 
bronze, had to be weighed. Even now in China, where 
coined money is not in use, merchants carry their scales and 
touch-stones with them. 

(£) The inconvenience of being required to weigh and 
assay metals every time they made an exchange led men to 
conceive the idea of using cut ingots, the weight and 
standard of which were fixed beforehand and guaranteed by 
some official seal or stamp. The legislator who first conceived 
this ingenious idea may justly boast of having really invented 
money. The pieces of metal used in exchange may properly 
be called coined money when they are not weighed, but 
counted. It seems probable that the first money was coined 
between 700 and 650 B.C. by a king of Lydia, a successor of 
Gyges. Specimens of this money may be seen in the 
British Museum. It is neither of gold or silver, but an alloy 
of the two metals, known to the Greeks as " electrum." It 
is not disk-shaped, but formed like a bean, and bears only 
the traces of a few scratches and three indentations. Some- 
what similar money is nowadays used in China, where the 
pieces of metal frequently bear the trademark of business 
houses supposed to certify to their weight and degree of 
purity. 

(e) Still another step had to be taken. The cubical or 
the irregularly shaped piece of metal was inconvenient, and 
in spite of the stamp impressed on it with a view to guar- 
anteeing its weight and purity, nothing was easier than to 
" clip " it without leaving any traces of this debasement of 
its value. It was still advisable always to weigh it and thus 
make sure of its real value. To remove this and other practi- 
cal difficulties, men have adopted the form of coined money 
that is now thoroughly familiar to all civilized nations, i.e. 
small disks covered on both surfaces and on the edges with 
relief impressions, so that any tampering destroys the design. 



IS MONEY EXCEPTIONAL WEALTH? 219 

Once adopted, this type of money underwent but little modifica- 
tion. To describe it we may make use of the definition given 
by Professor Jevons, " Coins are ingots of which the weight 
and fineness are guaranteed by the government, and certified 
by the integrity of designs impressed on the surfaces of the 
metal." 

II. Is Money a Superior Kind of Wealth? 

The popular answer to this question admits of no doubt. 
At all epochs and in all places, except among savages, money 
has occupied an exceptional place in the thoughts and desires 
of men. They regard it, if not as the only wealth, at any rate 
as by far the most important wealth. Indeed, they appear 
to measure the value of all other wealth by the quantity 
of money that can be obtained in exchange for it. To be 
rich is to possess either a large amount of money or the 
means of obtaining it in exchange for other goods. 

It would be interesting to trace through history the various 
manifestations of the idea that confounds gold with wealth. 
The mediseval alchemists attempted to transmute the baser 
metals into gold and thus accomplish what they called the 
magnum opus; had they succeeded, the result would have 
been far less important as a chemical discovery than as an 
economic revolution. In later times, we mark the enthusiasm 
kindled in the Old World by the arrival of the first gold- 
laden galleons from America, and the subsequent belief that 
in the new Eldorado an end would be found for all human 
misery. A similar idea underlay the complicated systems 
introduced by most European governments in the sixteenth 
and seventeenth centuries to cause the influx of money 
into the countries that had none, and prevent its exportation 
from those that were well provided with it. Even to-day, 
the anxiety with which statesmen and financiers watch the 
exportation and importation of coin, caused by variations in 
the imports and exports of goods, is fundamentally due to 
the same conception of the importance of money. 



220 PRINCIPLES OF POLITICAL ECONOMY 

But if we ask the economists whether or not money is a 
superior kind of wealth, the answer will be entirely different 
from the popular opinion. In fact, the first impetus to the 
growth of a scientific political economy was the protest 
against the popular conception of money, regarded by the 
earliest economists as a mere prejudice. The science had 
scarcely been founded when Boisguillebert, in 1697, declared, 
" It is quite certain that money is not a good of itself, and 
that its quantity has nothing to do with the opulence of a 
country." Since then economists have shown little concern 
about the amount of money, and maintained that it is a 
commodity like all other commodities, and even inferior to 
others because it is in itself incapable of satisfying any want 
directly, or of affording any pleasure ; it is consequently theonly 
commodity of which we may say that its abundance or scarcity 
is a matter of perfect indifference. If there are few pieces of 
money in a country, each one will have a greater purchasing 
power ; if there are many, the purchasing power of each will 
be smaller. So what does the quantity matter? 

These two opinions, however contradictory they seem, may 
easily be reconciled. The public is right from the individual 
point of view — the only one which interests it ; economists 
are right from the general or social point of view. The dis- 
tinction here involved requires some explanation. 

Every piece of money must be regarded as a ticket or order, 
drawn on the sum-total of existing wealth, giving the bearer 
the right to claim a part of this wealth not exceeding the 
value indicated on the coin. 1 It is clearly our individual in- 

1 Coins, however, represent orders or tickets that are superior to ordinary 
credit instruments for the reason that they carry their own guaranty with them, 
inasmuch as the value of coins is, in part at least, assured by the value of the 
metal contained in them. " If you know how to read," says Bastiat, " with 
the eyes of the mind, the inscription which a coin bears, you will clearly dis- 
tinguish the words : Give to the bearer a service equivalent to that which he 
has given to society, a value that is disclosed, proved, and measured by that 
which I myself contain." We must add that we cannot without some re- 
striction accept the optimistic postulate that every piece of money repre- 
sents a service rendered by its owner. 



IS MONEY EXCEPTIONAL WEALTH ? 221 

terest to possess as many of these " orders " as possible ; the 
more we have the richer we are. We know very well that, 
in themselves, these " orders " can neither satisfy hunger nor 
slake thirst. Long before economists had pointed out this 
truth, legend taught the same principle in the tale of King 
Midas, who died of hunger although surrounded by wealth 
which his own folly had turned into gold. Nevertheless, we 
regard these " orders " as far more convenient than any other 
kind of wealth, and we are right in doing so. 

Given the present organization of society, the person who 
desires to obtain an object that he has not produced (and the 
immense majority of people are thus situated) can get it only 
by means of two operations : first, by exchanging the product 
of his labor, or his labor itself, for money ; second, by exchang- 
ing this money for the object desired. These two operations 
are called selling and buying. The second of them, purchase, 
is very simple ; by means of money a desired object may easily 
be obtained. The first process, sale, is much more difficult ; 
an object, even of great value, cannot at all times be readily 
exchanged for money. Hence the possessor of money occu- 
pies a more favorable position than the possessor of any other 
commodity ; in order to satisfy his wants he has but one 
operation to perform, and this operation is an easy one. The 
possessor of any other kind of goods must accomplish two 
operations, one of which is comparatively difficult. It has 
been well said that a particular commodity corresponds only to 
a special and determinate want, while money corresponds to an 
indeterminate and universal want. The owner of a very useful 
commodity may not know what to do with it. The possessor 
of money, on the other hand, is never thus embarrassed ; he is 
always able to find some one to accept it, and if by chance he 
is at a loss how to make use of it at once, he still has the sim- 
ple expedient of keeping it for a more favorable opportunity. 
With other commodities this expedient is not always possible. 1 

1 Money, besides being the only direct instrument of purchase, possesses 
another very important quality : it is the common means of paying debts. No 



222 PRINCIPLES OF POLITICAL ECONOMY 

But if, instead of considering the position of an individual, 
we regard the whole mass of individuals constituting society, 
the point of view changes, and the economist's thesis (that 
the amount of money in a country is a matter of indifference) 
is more correct. Little do I care for a tenfold increase in 
the amount of money in my possession, if the same, increase 
takes place for all the other members of society. For in such 
an event I should be no richer than before ; since wealth is 
purely relative I should not be able to obtain a larger amount 
of goods. The sum-total of wealth out of which our claims 
or " orders " are paid would be no greater than before, and 
each " order," i.e. each piece of money, would entitle me to a 
share only one-tenth as large. In other words, the purchas- 
ing power of each coin would be one-tenth as great ; or, all 
prices having been multiplied by ten, my position would not 
be changed. 

Yet, in their relations with each other, particular countries 
as well as particular individuals gain by being well provided 
with money. If the amount of money in this country should 
be multiplied by ten, there would be no change in the wealth 
of Americans as compared with each other, the increase being 
equivalent for all ; but the country as a whole would be more 
favorably situated as regards trade with foreign countries. 
The economists who, in their zealousness to overthrow the 
mercantile system, have denied this, are mistaken. It is of 
course true that an abundance of money in this country 
would cause its value to fall here, but it would still retain, 
at least for a while, its former purchasing power in foreign 

other wealth enjoys this singular power, for law as well as custom regards 
money as the only means of payment. Under the prevailing industrial sys- 
tem, everybody is a debtor for a more or less considerable sum. Now the 
possession of goods worth more than the sum-total of a man's debts may be 
useless, if at the required time he is unable to meet his outstanding obliga- 
tions by means of that particular form of wealth called hard cash. It some- 
times happens that men " fail," despite the fact that when all reckonings are 
made their assets are found to exceed their liabilities. Is it surprising, then, 
that so much importance is attached to a commodity on the possession of 
which our credit and our commercial honor may at any moment depend ? 



THE VALUE OF MONEY 223 

markets ; and we might thus use' our increased supply of 
money to purchase goods abroad. 

The economist's thesis that the quantity of money is a 
matter of indifference is not perfectly true until we extend 
our purview so as to embrace not only many individuals and 
many nations, but all mankind. We may then assert with 
perfect truth that the discovery of gold mines a hundred 
times richer than those now known would not benefit man 
at all. Nay, such a discovery would rather be a disadvan- 
tage ; for as gold would then be worth no more than copper, 
we should be compelled to load our pockets with as cumber- 
some a kind of money as Lycurgus sought to force upon the 
Lacedaemonians. 1 

III. Disturbances caused by Fluctuations in the Value of Money 

Price, as we have seen, is only one of the many possible 
ways of expressing exchange value. Although we often 
employ one of these terms for the other, it is inadvisable to 
confound them. To believe, for example, that when the 
price of a commodity is the same in two places, its value is 
necessarily the same, or, inversely, to believe that when the 
price of a thing has varied, its value must also have varied 
to the same extent, may be a gross error. 

If the value of gold and silver is different to-day from what 
it w T as yesterday, it is evident that the value of any other 
object, measured in gold and silver, must also have changed ; 
that is to say, its price has varied to a degree inversely pro- 
portionate to the change that has taken place in the value of 
the precious metals. Suppose that the length of a yard-stick 
is reduced by one-tenth. Henceforth, all objects measured 
with it appear to be longer ; yet in reality they are no longer 
than before, because the apparent change is only an illusion 
produced by a contraction of the unit of measurement. Simi- 

1 Adam Smith declared that "the most abundant mines of precious metals 
would add nothing to the wealth of the world, as a product whose value is 
based on its scarcity is necessarily depreciated when it abounds." 



224 PKINCIPLES OF POLITICAL ECONOMY 

larly, if gold and silver lose one-tenth of their value (because, 
let us say, of their abundance), it is evident that the price of 
all objects, i.e. their value expressed in money, must have 
increased. 

We may therefore formulate the following law: Every 
fluctuation in the value of money causes a proportionate in- 
verse fluctuation in prices. 1 

As the quantity of gold and silver is the principal factor 
affecting the value of money, we may add this second 
formula, which is, however, open to more exceptions than 
the first : Every fluctuation in the quantity of money causes 
a proportionate change in prices. If, for example, the quan- 
tity of money in a country should be doubled, we may be 
sure that, all other things being equal, prices will rise con- 
siderably ; it would be unsafe, however, to maintain that they 
would be precisely doubled. 2 

It is consequently very difficult to tell whether or not the 
value of commodities has really changed, for the only meas- 
ure we have is itself subject to variations. So it may hap- 
pen that an increase in wages, for instance, is due not to a 
real rise in the value of labor, but to a fall in the value of 
money, in which the wage of labor is paid. Several devices 

1 Is the inverse statement true ? Can we say that every fluctuation in prices 
means an inverse fluctuation in the value of money ? Yes, if the change of 
prices is absolutely general. No, if the change is not general ; for in this 
case a change in the prices of particular objects must be due to circumstances 
concerning these objects themselves. 

2 This second formula, called the quantity theory of money, has lately 
been adversely criticised and even expressly denied ; but, we believe, without 
reason. We must, of course, be careful to add the condition, "all other 
things being equal," thus indicating that quantity is not the only factor that 
influences the value of money. The development of exchange, the growth of 
population, the substitution of instruments of credit for metallic money, and, 
above all, the increased or decreased rapidity of circulation (which is equiva- 
lent in its effects to an increase or decrease in quantity), constitute just so 
many causes which may affect the utility of money and thus alter its value, 
independently of any change in the quantity thereof. 

Horace White's "Money and Banking " (first ed.) contains an interesting 
chapter on the quantity theory of money. 



THE VALUE OP MONEY 225 

have been suggested for detecting and correcting these 
apparent variations in value which are due to variations in 
the standard. The most customary method, however, is that 
known as the system of " index numbers." 

Suppose that a list were prepared of all commodities 
without exception, indicating the prices of all these commodi- 
ties at a given time. Now suppose that after ten years or a 
hundred years we should prepare a new list of these com- 
modities and their current prices ; and, after comparing the 
new list with the old, suppose we should find that all prices 
without exception had increased 50 per cent. We should 
then declare that the value of money had really fallen 33 
per cent. Since, under these conditions, an object which 
formerly had cost two dollars now costs three, we may say 
that three dollars now have the same value as that previously 
possessed by two, and that money has lost one-third of its 
value. 

This conclusion is justified by the fact that a general and 
uniform rise in prices can have but one of two explanations. 
Either we must admit that things are what they seem to be, 
and that all commodities really have undergone a general 
and parallel rise in prices ; or, we must acknowledge that 
the value of one commodity — money — has fallen, no altera- 
tion having taken place in the value of other commodities. 
Now which of these two explanations is preferable ? Com- 
mon sense permits of no hesitation. The second explana- 
tion is simple and comprehensible, whereas the first is highly 
improbable because of the extraordinary combination of cir- 
cumstances which it necessarily presupposes. Is it reason- 
able to imagine the existence of some influence which can 
simultaneously cause a uniform change in the value of 
objects which are entirely dissimilar as regards their utility, 
their quantity, and the method of their production ? What 
conceivable cause could, simultaneously and to a similar 
extent, raise the price of silk and of coal, of wheat and of 
diamonds, of lace and of wine, of land and of manual labor, 



226 PRINCIPLES OF POLITICAL ECONOMY 

and of all other things that have little to do with each other 
or that are in fact entirely independent ? To adopt such 
an explanation as this would be just as unreasonable as 
to maintain that the Ptolemaic system explains planetary 
motion better than the Copernican theory. For planetary 
motion also may be explained in two different ways : either 
by the assumption that the whole universe turns about 
our own earth from the east to the west, or simply that 
our own earth revolves in the opposite direction. Even if 
there were no direct proof of the latter explanation, it would 
not be reasonable to hesitate for a moment in the choice of 
one of these solutions. Is it natural to suppose that planets 
so different in their nature and so far apart as the sun, the 
moon, and the stars, move around this small earth of ours in 
such a way as to keep their respective places and distances 
from each other, like soldiers on parade ? The very same 
kind of logic is involved in the supposition that all prices 
can rise simultaneously and uniformly. Such an occurrence 
may be reasonably explained only as a kind of optical illu- 
sion, an apparent change caused by a real but opposite change 
in the value of money. 

It must be admitted, however, that an absolutely general 
and uniform rise in prices never takes place. As the value 
of each object is to some degree independent of that of other 
objects and consequently has its own causes of variation, 
what we really do observe in the economic world is that the 
prices of different commodities vary in different degrees. 
Some prices rise, others remain stationary, and still others 
fall. Yet if, during any period, skilful calculations should 
show that there had been an average rise of say 10 per cent, 
this phenomenon, for the reasons given above, could be ex- 
plained only by an equal and inverse change (i.e. a fall) in 
the value of money. Economists have recently attempted a 
calculation of this nature by preparing lists of " index num- 
bers." These lists include the principal commodities, and 
the price at a given epoch is taken as the starting-point. A 



THE VALUE OF MONEY 



227 



list is prepared for each of the years under study, and a com- 
parison of totals indicates whether or not prices as a whole 
have increased or diminished. To simplify the use of these 
calculations, it is customary to express the total for the year 
which serves as the basis of comparison as 100 ; the totals for 
the other years are then expressed upon this basis of calcu- 
lation. The result of this simplification is a table like the 
following : — 

1860 . . . 100 



18T0 
1880 
1890 
1900 



144 

105 

94 

93 



Such tables as these, invented by an Englishman named 
Newmarch, do not always give conclusive results. It is, 
however, conceivable that we may thus ascertain, by means 
of the fluctuations in prices, the variations in the value 
of money. It would even be possible to publish, at regular 
intervals, tables of these fluctuations which would serve as 
an official guide for the correction of the errors resulting 
from the use of gold and silver as measures of value. Thus 
a debtor who in 1860 had borrowed $100 might be released 
from his debt upon paying $93 in 1900, — the amount due 
being determined by the rise or fall in the value of money. 1 

1 Tables analogous to those referred to were proposed as early as 1822 by 
Lowe and in 1833 by Scrope. 

The Austrian economist Menger has proposed a bolder solution than that 
mentioned above, viz. the creation of a money whose value would be invari- 
able and consequently beyond the influence of the general law of values. 
He believes that we could accomplish this by issuing money in quantities 
so adjusted as to neutralize the causes of fluctuations as soon as they should 
arise. 

We regard this scheme as theoretically reasonable, on the condition that 
the money be issued in the form of international paper money ; metallic 
money, the raw material of which is produced by nature, could hardly be 
issued in quantities strictly determined in advance. (Refer to the section on 
Paper Money.) 



228 



PRINCIPLES OF POLITICAL ECONOMY 



IV. Whether Metallic Money will continue to decline in 

Value 

The depreciation of metallic money during the past thou- 
sand years is a fact proved by all sources of historical in- 
formation that touch upon this point. This depreciation 
has been enormous. 1 At the time of Charlemagne the value 
of silver was approximately nine times as great as it is to- 
day. Shortly before the discovery of America it was still six 
times as great. At the time of the French Revolution it was 
more than twice what it is to-day. The prediction that its 
value will continue to decline indefinitely seems, therefore, to 
be perfectly legitimate. Human industry, moreover, is every 
day becoming more ingenious in discovering the places in 
which nature has stored away her treasures, and also more 
expert in exploiting these stores economically. Neither 
silver nor gold is as rare as it is supposed to be. There is 
gold and silver everywhere, — in infinitesimal quantities, to 
be sure, but the rapid progress of metallurgy is , continually 
lowering the point below which it does not pay to extract 
the metal from the ore. It is therefore probable that the 
precious metals, becoming more and more abundant, will 
continue to fall in value. 

It may, of course, be maintained that the demand for these 
metals will be increased by the growth of population and the 
development of exchange, and that this increased demand 

1 The decline has not been steady, but intermittent ; at times the value of 
money has risen. According to d'Avenel's " Histoire des Prix," the historical 
curve of values is as follows : — 



850 
1375 
1500 
1600 
1750 
1890 

The most striking fact brought out by these flgur 



9 
3 
6 

2* 

3 

1 



es is the great fall in the 
value of money during the sixteenth century, due to the discovery of America. 



DEPRECIATION OF MONEY 229 

will counterbalance the effects of an increased supply. But 
we must remember that this factor is in turn more than 
counterbalanced by the improvement and extension of the 
credit system and modern means of transportation and inter- 
course. In the great modern financial centres we have suc- 
ceeded in almost entirely suppressing the use of metallic 
money, and are now carrying on a vast amount of business 
by means of credit devices and clearing-houses, practically 
without the intervention of money. 

Is this increase in the quantity of money, and the subse- 
quent depreciation of its value, a cause for regret, or rejoic- 
ing ? Is it a matter of any importance ? It may be claimed 
that an abundance of money makes nobody richer in reality, 
and that it is likely to make money constantly grow heavier 
in proportion to its value, — as though gold had been changed 
into lead. But even this difficulty may be obviated by the 
use of paper money and checks. Again, supposing that the 
so-called precious metals should become common metals, is 
it not likely that other rarer metals would be found to take 
their place ? x 

Yet this is not a matter of indifference. In reality, the 
continued depreciation of the monetary standard is a phe- 
nomenon of great social importance, the effects of which 
must be regarded, after careful consideration, as beneficent. 
First of all, the depreciation of money results ordinarily, as 
we have seen, in a rise of prices. Now, a rise of prices is a 
stimulus to production ; it sustains the spirit of enterprise ; 
it is favorable to an increase in wages ; it acts like a tonic, 
and may be regarded as a symptom of economic vigor. 2 

1 Spectrum analysis reveals the existence of new metals much more pre- 
cious than gold. We are familiar with metals that cannot yet be employed 
to any extent, but which we shall doubtless soon learn to utilize by means of 
electric furnaces. Lithium and zirconium, for instance, cost $7500 per 
pound, and vanadium $11,800. 

2 A curious proof of this may be found in new countries, like those of 
South America, where the inconsiderate increase of the amount of paper 
money caused an enormous rise of prices. Producers and business men 



230 PRINCIPLES OF POLITICAL ECONOMY 

The depreciation of money, moreover, is favorable to the 
debtor classes, inasmuch as they can pay their debts by giv- 
ing a value less than that which they received ; for then it 
means — to repeat a familiar expression used in referring 
to the discovery of mines in America — an easy way to pay 
old debts. It operates in just the same way as a fall in the 
rate of interest, or, better yet, like an unavoidable deprecia- 
tion of capital. Now, it is very desirable that the old debts 
shall be wiped out, and not be permitted to weigh upon 
the descendants of the borrowers. 1 This is particularly de- 
sirable for governments, which are the greatest debtors and 
the only really perpetual ones. 

rejoice at this rise, and in general are very hostile to the financial measures 
that would remedy it, as, for example, the withdrawal of paper money. 
Their opposition is of course ill-founded, but their attitude is none the less 
characteristic. 

1 Mr. Herckenrath, in the Dutch translation of this book, criticises the 
doctrine sustained in this section. He does not regard the depreciation of 
precious metals as always desirable. Von Ihering also, in his " Kampf urns 
Recht," declared that "to sympathize with the debtor is the clearest sign of 
the weakness of an epoch." We acknowledge, later on, in the section on the 
" History of Loans at Interest," that nowadays the lender may indeed be 
entitled to quite as much sympathy as the borrower, especially when the 
lender is a small investor and the borrower is a large corporation. Never- 
theless, the growing power of money seems to us always to constitute a seri- 
ous social danger, and the depreciation of the metals appears to be a fortunate 
corrective of this tendency. 

[Professor Gide is fond of the idea that a perpetual depreciation of money 
is a perpetual stimulus to trade. It should be observed, however, that the 
creditor who knows that he is going to be exploited will recoup himself in the 
interest rates. If this is not the case, high prices will enable debtors to pay 
their debts with less wealth than they borrowed, and thus permit the partial re- 
pudiation of these debts. The most elementary commercial honesty requires 
that the debtor shall pay back (aside from interest) just what he received, — 
no more and no less. But if, for example, I have borrowed a thousand dollars, 
and prices subsequently rise to such an extent that a thousand dollars will 
purchase only as much as could previously be bought for nine hundred dol- 
lars, it is evident that in repaying a thousand dollars I am returning less value 
than I received ; in other words, I have been enabled to repudiate one tenth 
of my debt. A large amount of capital loaned in this country consists of 
the savings of people with small incomes, and repudiation would bear heavily 
upon them. — C. W. A. V.] 



DEPRECIATION OF MONEY 231 

It is true that to the very degree that the depreciation of 
money is favorable to the producer and to the debtor, it is 
prejudicial to the consumer and to the creditor. But even 
this effect we regard as desirable. For if the consumer 
is also a producer, his increased expenditure is easily coun- 
terbalanced by the increased value of his products or by 
higher wages. 1 If he is simply a consumer, and not a pro- 
ducer, so much the worse for him ; the rise of prices will 
only put a heavier, perfectly legitimate burden upon him. 
Again, if the creditor has given credit for short periods, such 
as are customary in commerce, the depreciation in money 
will scarcely affect him. But if his credit is for a long period 
or for perpetuity, i.e. if it constitutes the basis of a permanent, 
independent income (such as that provided by government 
bonds, land rent, long-term railroad bonds, or municipal 
loans), it is no more than right that the gradual reduction 
of his income should warn him that he is plajdng the part of 
a parasite, and that if he wants to retain his social position 
or transmit it unimpaired to his descendants, he would do 
well to play a more active part or teach his children to do so. 
Some time ago a great financier of the French Restoration, 
Lafhtte, who was by no means a socialist, speaking of the 
man who lives on a fixed and independent income, said : 
" He must either work or reduce his wants. The capitalist 
plays the part of the idler ; his task is to economize, and it 
is not a severe one." 2 

To prove the validity of what we have said, let us suppose 
that our prediction regarding the fall in the value of precious 

1 Unfortunately, the change of wages due to a rise in the price of com- 
modities does not follow very rapidly upon this change of conditions ; it is 
likely to take place some time later, pede claudo, wherever laborers are not 
organized. But where the workers are organized into trades unions, they 
generally demand, and frequently obtain, a speedy readjustment of wages. 

2 The intelligent members of the "retired" capitalist class have several 
means of escaping the effects of a fall in the value of money ; they can, for 
example, invest their funds in productive enterprises, or purchase credit 
instruments below par. 



232 PRINCIPLES OF POLITICAL ECONOMY 

metals will not be fulfilled, — and we must admit that our 
predictions are by no means infallible. What would be the 
result? We should then observe effects opposite to those 
that we have indicated : a constant fall in prices would 
burden industry and discourage the spirit of enterprise; 
governments would be oppressed. by the weight of a rapidly 
increasing debt and destined to become bankrupt ; the idle 
classes of money-owners would grow rich by their idleness 
more surely and quickly than the other classes could by their 
thrift. Such a state of affairs as this would be most liable 
to provoke a social revolution. Let us therefore rejoice in 
the depreciation of the precious metals, so long as it lasts ; 
it serves at least as a lubricant for the wheels of the eco- 
nomic mechanism. 

V. The Conditions which should be fulfilled by all Good 

Money 

All legal money should have a metallic value strictly equal 
to its nominal value. This is the most important principle 
regarding money. 

We know (page 221) that money has a twofold function: 
it is the sole instrument of purchase, and the only instrument 
for the payment of debts. Both of these functions are the 
result of custom, but both require the sanction of law. In 
fact, only the law can oblige a creditor or seller to receive a 
certain kind of money in payment of debts or for goods. 
This legally privileged position of money makes it what is 
called legal tender. But the legal tender quality is based 
on the condition above indicated. Here, let us say, is a ten- 
dollar gold piece. By stamping on this coin the designation 
" ten dollars," as well as the seal of the United States, the 
government intends to certify that this coin is really worth ten 
dollars, and that everybody shall accept it for that amount 
without fear of misrepresentation. Should the coin not con- 
tain this value, the government commits a forgery. During 
many centuries, unfortunately, many governments and rulers 



THE QUALITIES OF GOOD MONEY 233 

have shown but little scrupulousness in this respect ; but at 
the present time it is a matter of national dignity and good 
faith in which no government would dare be found at fault. 
Every piece of money must therefore be regarded from 
two points of view. As a com, it possesses a fixed value, 
marked upon its surface. As an ingot, it has a value equivalent 
to the' market price of the metal it contains. (There is of 
course a market price ' for gold and silver, as well as for 
wheat and cotton.) Whenever these two values coincide, — 
whenever, for instance, the metallic disk weighing 258 grains 
and containing 232.20 grains of pure gold (i.e. whose fine- 
ness is nine-tenths) has an actual commercial value of ten 
dollars, — we may say that this money is good money or 
sound money. 1 It remains to ascertain how this perfect coin- 

1 It would appear, however, that coined gold should be worth a little more 
than bullion, for the reason that all objects are worth more when manufac- 
tured than when in the raw state, and that the difference should be equal 
to the cost of coining. This is in fact the case ; but the cost of coining is so 
small that it makes practically no difference. It amounts to one-fifth of one 
per cent of the value of the coin. In France, for example, the twenty-franc 
gold piece is made of gold worth 19.96 francs. Some governments transform 
metals gratuitously into money ; or, in other words, the government bears 
the actual cost of coinage, which is sometimes called brassage. England is 
an example of this. Whenever a government charges more than the actual 
cost of coinage, and regards its Mint as a source of revenue, the term seignior- 
age is used to designate this additional charge. The name is derived from 
the fact that rights of coinage in the middle ages were often made a most 
valuable prerogative of the " seignior," or feudal lord. Where the govern- 
ment pays the brassage we sometimes also speak of gratuitous coinage, which 
must be sharply distinguished from free coinage. The latter term does not 
mean that coining is done for nothing, but that any private person has a right 
to bring bullion to the Mint in any quantities and have it coined (whether he 
is charged seigniorage or not). It should also be noted that sometimes the 
term seigniorage is used to include brassage. 

Gold bullion is converted into coin at the United States mints free of 
charge except for the alloy contained therein. Formerly the seigniorage on 
silver subsidiary coins was 5 to 7 per cent. Since the great decline in the 
price of silver took place, it has become more than 100 per cent. At one 
time the government could buy only 16 pounds of silver bullion with one 
pound of gold, but now it can buy more than 35 pounds for the same 
amount. 



234 PRINCIPLES OF POLITICAL ECONOMY 

cidence can be established and maintained. Two possible 
conditions of the monetary system should be examined in 
this connection : — 

I. If the value of the ingot is higher than that of the coin ; 
if, for instance, the gold is legally worth only ten dollars, and 
the weight of metal contained in it is worth eleven or twelve 
dollars, the money is said to be heavy. This is an excellent 
defect; but it is nevertheless a defect, and, as we shall see, 
it ma}^ have rather serious consequences. But we need not 
greatly fear such a state of affairs as this, for the following 
reasons : (a) Governments seldom coin too heavy money ; 
should this occur, it can only be due to inadvertence, inas- 
much as it involves a loss. To coin ten-dollar gold pieces 
with metal that is worth eleven dollars would be as ruinous 
as for a manufacturer to make rails for twenty dollars a ton 
with steel that is worth twenty-two. (5) But even if this 
condition existed, as the result of circumstances to be ex- 
plained later (for example, a sudden rise in the price of the 
metal), it cannot last very long ; for as soon as the public 
discovers that ten-dollar gold pieces are worth eleven dollars 
as bullion, everybody will regard them as bullion, i.e. as 
merchandise, and will sell them by weight so as to reap the 
profit thus obtainable. This process will continue until 
the gold coins have completely disappeared. As we shall 
point out later, this state of affairs occurs frequently in 
countries having a bimetallic system. 1 

II. If the value of the ingot is less than that of the coin ; 
if, for example, the coin is legally worth ten dollars and the 
gold it contains is worth only nine, money is said to be light. 
This eventuality is much more to be dreaded than the pre- 

1 The commercial ratio of gold and silver at the time the United States Mint 
was founded in 1793 was the same as the mint ratio, — 15 to 1. But in 1795 
the commercial ratio of the two metals rose to 15.37 to 1, and continued to 
advance until it reached 16.25 to 1 in 1813. The result was that gold coins 
had a greater bullion value than their coinage value and were exported. In 
1850, on the other hand, the silver dollar was worth $1.02 in gold and had 
entirely disappeared from use. (See the section on Gresham's Law.) 



THE QUALITIES OF GOOD MONEY 235 

ceding one, for two reasons : (a) Because, unlike the opposite 
condition of affairs, it is liable to lead a government into 
temptation. To make ten-dollar pieces out of ingots that 
are worth only nine dollars is an alluring proposition for an 
impecunious and not too scrupulous government ; and numer- 
ous governments have, as a matter of fact, succumbed to the 
temptation. In France, Italy, and in most of the countries 
of continental Europe, before the great development of 
modern commerce, the debasement of money was a favorite 
device of weak or profligate monarchs. 1 (&) Because, once 
such light money has entered into circulation, it is not forced 
out of circulation by the pressure of economic forces (as in 
the case of heavy money), but it remains most persistently ; 
and, as we shall see when we take up Gresham^s latv, it is 
one of the most difficult things in the world to drive light 
money out of circulation. 

To maintain the identity of metallic value and legal value, 
it is customary under every good monetary system — and 
this is a principle of capital importance — to give anybody 
the right to have metal coined into money by the Mint, if he 

1 " Both in quantity and quality, in weight and in fineness, the circulating 
money was pinched and robbed, until the actual amount of pure metal bore 
sometimes a ludicrously small ratio to the original fine contents of the coin. 
The English ' pound ' was once a pound-weight of silver. The pound of standard 
silver is now coined into 66 instead of 20 shillings. The ' pound scots ' of 
which we read had but one thirty-sixth of its original weight. The florin and 
the Spanish maravedi were once pieces of gold. The former is now a piece of 
silver ; the latter apiece of copper." — Francis Walker, " Political Economy." 

It is well known that the monetary unit under the old regime in France was 
called the livre (pound) ; but it is not so generally known that it derived its 
name originally from the fact that in the days of Charlemagne it actually repre- 
sented the weight of a Carolingian pound of silver (weighing 408 grammes) ; 
i.e. it represented a weight equal to that of 82 present-day francs. How did 
it fall little by little to five grammes, which was the weight of the livre at the 
end of the old regime, and which is now the weight of the franc ? Solely by 
a continual series of emissions of lighter and lighter money. Each monarch 
" clipped" a little off the weight of the old livre, while endeavoring to main- 
tain its former legal value. 

McMaster, in his " History of the People of the United States" (Vol. I, 
pp. 190 et seq.), gives an interesting account of the American monetary 



236 PRINCIPLES OF POLITICAL ECONOMY 

so desires. This is called free coinage. As long as it exists, 
the identity of values is guaranteed ; for if the value of the 
gold piece ever rises above that of the metal in it, everybody 
will hasten to avail himself of the profit to be made by 
having metal coined into money. Everybody will buy gold 
and take it to the Mint to be converted into coin, until 
the scarcity of gold and the increase in the number of gold 
coins has reestablished the identity of the two values. It 
should be possible to smelt good money without any loss of 
value. Good money can stand the "fire test." Here we 
may apply the economic axiom that whenever two objects 
can be transformed into each other at will, they must neces- 
sarily have an equal value. 

There are, however, in all countries certain kinds of coins 
which do not fulfil the preceding requirement; i.e. their 
intrinsic value is inferior to their legal value. These coins 
are called subsidiary or token money. They are usually coins 
of small value, generally made of copper, but sometimes of 
silver ; they are not customarily used for large payments, 
but only for fractional amounts. The legislator, therefore, 

system at the close of the Revolutionary War, — its chaotic state, and the 
practices of counterfeiting and clipping. " The clipping was worse than 
the counterfeiting, for scarce a coin could be found . . . which had not at 
some time been subjected to the shears. For much of the clipping and 
paring the people were to be held responsible ; but the government itself had, 
in an hour of dire extremity, resorted to the same practice as a desperate 
means of increasing its funds. When some coins were sent to Timothy 
Pickering to be used in payment of the debts of the quartermaster's depart- 
ment, there came with them orders that he himself should clip them, as the 
government was too poor to bear the charge of the goldsmiths. . . . The 
clipping done by the government differed from the clipping done by the 
rogues in that it stopped when the last grain the law would allow had been 
taken. At this point sharpers and counterfeiters began their work, and 
went so far that it was no longer safe to take any sum of money in discharge 
of a debt till every coin in the batch had been duly weighed in the balance. 
The day, indeed, seemed near at hand when, as Washington said, every man 
would be constrained to travel with a pair of balances in his pocket, or run 
the risk of receiving gold and silver at one-fourth less by weight than by 
count, and when, as Teague complained, there would be five quarters to 
every dollar." 



gresham's law 237 

does not feel bound under these conditions to insist on the 
observance of the above monetary principle. But in tem- 
porarily abandoning the principle of the equality of values, 
he at the same time withholds the qualities of good money. 
He refuses to confer upon token money the quality of legal 
tender ; no one is compelled to take it in payment, save in 
limited quantities. 1 In addition to this, he suspends free 
coinage for token money ; otherwise everybody would have 
metal coined into subsidiary coins, or token money, in order 
to gain the difference between the metallic value and the 
legal value. The government reserves to itself the right to 
issue such amounts of token money as in its judgment are 
required by the needs of the community ; and it should 
never issue an excessive quantity of this money. 

VI. Gresham's Law 

In every country where two kinds of legal money are in 
circulation, the bad money always drives out the good. 

This is one of the most curious laws of political economy, 
named after the commercial adviser of Queen Elizabeth, who 
is credited with having discovered it three centuries ago. 
Long before Gresham, however, Aristophanes had pointed 
out and analyzed the strange fact that men seem to prefer 
bad money to good money. 2 What makes this fact, and the 
law which formulates it, still more remarkable is that it 
would be totally incomprehensible in the case of any other 
article than money. It is indeed difficult to understand why 
men should prefer bad to good merchandise. The economic 

1 Silver coins smaller than one dollar are legal tender to the amount of ten 
dollars in one payment. Coins of nickel and copper are legal tender to the 
amount of 25 cents in one payment. 

2 " The public has often seemed to us to treat the wisest and the best of our 
citizens just as it does old and new coins. For we do not use the latter at 
all, except in our own houses or abroad, though they are of purer metal, finer 
to look at, the only ones that are well coined and round ; on the contrary, 
we prefer to use vile copper pieces, struck and stamped in the most infamous 
fashion."— Aristophanes, "Frogs," vv. 718-726 (Brunch's ed.). 



238 PRINCIPLES OF POLITICAL ECONOMY 

organization of modern society, marked by liberty of labor 
and by free competition, is based entirely on the postulate 
that men will under all circumstances prefer the articles that 
are of the best quality and that best satisfy their wants. 
Why, then, should men act differently when money is the 
article in question ? 

Our astonishment ceases when we reflect that money is 
not destined, like other wealth, either for our consumption 
or for production, but solely for exchange. Of two fruits, 
we prefer the more luscious ; of two watches, the one that 
keeps the better time. But of two pieces of money, unequal 
in quality, it matters little to us whether we use the one or the 
other ; they are not for our personal use, but only employed 
to pay our creditors and our tradesmen. Hence it would be 
foolish to use the better money for this purpose ; on the con- 
trary, it is to our interest to choose the worse, and this is 
precisely what we do. Our choice is of course conditioned 
upon the assumption that the creditor or tradesman shall not 
have the right to refuse the inferior money ; in other words, 
the bad money must have paying power as well as the good. 
When this is the case, i.e. whenever both kinds of money 
are legal tender, Gresham's law is applicable. 

This explains why bad money continues in circulation, 
but not why good money disappears. Where does the good 
money go ? It disappears in three different ways : by hoard- 
ing, payments abroad, and sale by weight. 

(1) Hoarding. When people want to put money aside for 
possible emergencies, i.e. when they wish to keep it for them- 
selves, they clo not pick out the bad pieces to save. On the 
contrary, they choose the best, because these offer the most 
security. The panic-stricken people who wished to hoard 
money during the French Revolution did not waste their 
time by saving depreciated paper money, — the so-called as- 
signats, — but laid aside good gold coins. The contempo- 
raries of our own Revolutionary War did not save the next 
to worthless " continental " paper money, but whatever 



gkesham's law 239 

metallic money they could get hold of. Banks do the same 
thing, preferring to increase their supply of good rather than 
that of poor money. In this manner a considerable amount 
of the good money may disappear from circulation. This 
first cause of the disappearance of good money, however, is 
only temporary. 

(2) Payments abroad. These are more important in their 
effect than the preceding cause of the disappearance of good 
money. Although a country never pays in coin for more 
than a small part of its imports, yet it is always necessary to 
send a certain amount of specie abroad. Now, although we 
may legally pay our debts to our compatriots with bad money 
as well as with good, so long as both are legal tender, we 
do not have this alternative in paying for purchases made 
abroad. As the foreign creditor is by no means compelled 
to accept our national money, he takes it only for the weight 
of fine metal it contains, i.e. for its commercial value. There- 
fore we cannot send him light money. We keep the light 
money for use at home, where it is as serviceable as good 
money, and we reserve the good money for foreign commerce. 1 

(3) But good money disappears most rapidly from circula- 
tion because of its sale by weight. Selling money by weight 
appears to be a peculiar occupation in which to engage, and 
its usefulness does not seem easily demonstrable. Never- 
theless, it is very simple. As soon as a rise in the value of 
gold gives gold coin an intrinsic value higher than its legal 
value, — as soon as gold money is worth more as metal than 
as coin, — it is clearly profitable to stop using it as money, 
and to regard it as bullion. It is, therefore, withdrawn from 
circulation, and finds its way to the market for precious 
metals. Should the value of bronze, for example, rise con- 

1 Professor Leroy-Beaulieu has very well summarized this whole matter in 
the formula : local money drives out universal money. 

It is noteworthy that Aristophanes observed the two facts that the public, 
which prefers to use bad money in exchange, nevertheless employs good 
money " in its own houses " and " abroad," i.s. for hoarding and for foreign 
trade. 



240 PRINCIPLES OF POLITICAL ECONOMY 

siderably, is it not almost certain that numerous bronze 
articles, such as bells, cannons, and statuettes, would be 
melted for the value of the metal they contain ? Or again, 
if the value of paper increased very greatly, would not many 
books be taken down from our library shelves and sold by 
weight as so much paper ? It is just the same with money. 
When a precious metal rises in value, the pieces of money 
coined from that metal lose their character of money and be- 
come simple commodities that men can sell at a profit. 

Gresham's law is applicable in the following cases : — 

(^L) Whenever worn money is in circulation together with 
newly coined money. It was in this case that the law was 
first discovered by Sir Thomas Gresham. New coins had 
been struck to take the place of those in circulation, which 
were greatly depreciated (far more by clipping than by 
wear) ; and it was noted with dismay that the new coins 
speedily disappeared, while the old ones seemed to be more 
abundant than ever. Unless a government resorts to fre- 
quent recoinages, it will encounter great difficulties in 
replacing old and worn-out coins by new ones. 

(i?) Whenever depreciated paper money is in circulation 
together with metallic money. Under these conditions, if 
the depreciation of the paper is at all considerable, coin is 
driven out of circulation on a very large scale. During the 
whole period of the depreciation of United States notes 
(1862-1879), we were exporting gold in large quantities. 
This left at home only paper money, because our paper money 
would not circulate beyond the borders of the nation. 1 

( (7) Whenever light money is in circulation together with 
good money, or even when good money is in circulation to- 

1 Similarly, of late years, nearly all good Italian money was driven into 
France. Vainly did the Italian government adopt various measures to cause 
its return, and to obtain from the French government a prohibition of its 
circulation in France, where it is accepted equally with French gold and 
silver money. But Italy succeeded only by attacking the evil at its founda- 
tion — by withdrawing her paper money, or at least by depriving it of the 
quality of legal tender. 



GOLD, SILVER, AND COPPER 241 

gether with heavy money. In this case the lighter money 
drives out the other. 

Of the three cases here enumerated, the last is by far the 
most important ; it occurs in almost all countries which 
have adopted both a gold and a silver coinage. This case 
will be investigated in the discussion of monometallism and 
bimetallism, which we purpose to study in the following 
sections. 

VII. The Necessity of employing Several Metals, and the Dif- 
ficulties which result therefrom 

The discussion which has long been waged on this cele- 
brated subject does not turn, as might be supposed, on the 
question whether a country should employ several metals or 
only one metal in its monetary system. That question does 
not even arise. For it is evident that every civilized country 
is obliged to employ, simultaneously, coins of gold, of silver, 
and of copper or some similar metal. We could scarcely 
think of using gold alone. The one-dollar gold pieces author- 
ized to be coined in 1849 are now no longer issued because 
they are too small to be used conveniently. And if these 
pieces, weighing only 25.8 grains, are too small, a gold cent 
would be a mere impalpable atom ! Nor can we employ 
copper exclusively, unless we are willing to revert to the 
days of early Rome; for a piece of copper worth five dollars 
weighs about thirty-five pounds. Silver, though less incon- 
venient because its value is considerably higher than that of 
copper, would not suffice by itself. Our silver dollars are 
almost too large and cumbersome, and our silver three-cent 
pieces, not coined since 1873, are too small for ordinary 
use. We are therefore compelled to use all three metals 
simultaneously. But there is no need to use all three as 
legal tender. In fact, one of them — copper — never pos- 
sesses that quality ; it is always simply token money or small 
change. Only the other two, therefore, are of interest in 



242 PRINCIPLES OF POLITICAL ECONOMY 

this connection. Should both precious metals receive the 
character and attributes of legal tender, or should only one 
be thus employed ? This question, formerly called that of 
the single or double standard, is now more correctly termed 
the problem of monometallism or bimetallism. 

If we confer the rank of legal tender on only one of the 
two — say gold — there is no difficulty. In this event silver 
coinage, with copper coinage, is relegated to the rank of 
token or subsidiary money ; a purely conventional value is 
given it, but no one is obliged to take it in payment. When 
gold coinage is the only legal money, it alone needs have 
perfectly equal legal and intrinsic values. 

If we allow both silver and gold coins to assume the char- 
acter of legal tender, the situation becomes far more compli- 
cated. For a better understanding of the difficulties which 
may arise in the actual employment of both metals simultane- 
ously as legal money, let us briefly review the monetary his- 
tory of the United States. 

In 1792 our statesmen, following the example of the coun- 
tries of Europe, adopted the double standard of gold and silver. 
At Hamilton's instance the legal ratio was fifteen grains of 
silver for one grain of- gold. Soon afterward, silver cheapened 
so that 15.61 grains were required in the bullion market to 
purchase one grain of gold. As a result, gold went out of 
circulation, and the country was thrown practically upon a 
silver basis. Gold, which had begun to grow scarce in 1810, 
entirely disappeared in 1817. In 1822 Mr. Raguet, an econo- 
mist of the period, wrote to the National G-azette that "although 
the coinage of gold continues to be large ($1,319,030 in 1820), 
not a gold coin is anywhere to be seen in circulation." The 
facilities of the Mint were simply used by merchants to certify 
the weight and fineness of gold for exportation. 

In view of these facts, various projects for a change were 
brought forward in Congress, and in 1834 the so-called Gold 
Bill provided for a ratio of 1 to 15.60 ; but when it came up 
for discussion an amendment was moved making the ratio 



AMERICAN METALLIC MONEY 243 

1 to 16, and this amendment was adopted without a division. 
Then another amendment was offered making the ratio 1 to 
15.625, and was supported on the ground that it was the true 
market ratio, and that it would keep gold and silver in con- 
current circulation. The adoption of the ratio 1 to 16, it 
was contended, would drive silver out of circulation. Yet 
this ratio was finally adopted, making the United States a 
gold-standard nation in practice, although the double stand- 
ard was retained in theory. Since 1837, when other changes 
were made, the weights of the coins and their legal ratio 
have remained unchanged. The silver dollar was given 
371.25 grains of pure metal, and the gold eagle 232.2 
grains; this is a legal ratio of 15.988 to 1. This ratio of 
practically 16 to 1 — almost as celebrated a formula in eco- 
nomics as the formula for it in geometry — then overvalued 
gold so decidedly that silver coins began to disappear from 
circulation. In 1850 the silver dollar was worth $1.02 in 
gold and had entirely disappeared from use. In the early fif- 
ties the discovery of gold in California and in Australia caused 
the annual output of gold to increase fourfold. 1 Silver, on 
the other hand, became still more scarce in consequence 
of the development of trade in India, which absorbed vast 
quantities of this metal. The result was that gold continued 
to cheapen so that Congress in 1853 had to debase the frac- 
tional silver coins in order to prevent them from being melted 
and sold for bullion. The legislation of 1834 and 1837 had 
thrown the United States upon a gold basis, for while the 
legal ratio was 16 to 1, the commercial ratio until 1873 was 
about 15J to 1. 

In 1870 Congress again began to consider the question of 
revising the coinage laws. The silver dollar had then been 
out of circulation for more than a generation, and was worth 
$1,027 in gold. By the act of 1873 the silver dollar was 

1 The average annual world's production of gold from 1841 to 1850 was 
valued at about $37,000,000 ; from 1851 to 1860 the annual output averaged 
nearly $140,000,000. 



244 PRINCIPLES OF POLITICAL ECONOMY 

dropped from the list of authorized coins, and the gold dollar 
was definitely named as the unit of value. 

At about the same time, however, another great change 
took place in the production of precious metals. The output 
of gold decreased with the gradual exhaustion of the gold 
mines of Australia and California. The discovery of the 
"bonanza" silver mines in the West greatly increased the 
production of silver; the world's annual output of this metal 
was increased by about half. Then Germany adopted the 
gold standard, demonetized her silver money, and cast upon 
the market the silver thalers which she no longer wanted. 
Once again the relative value of the two metals was changed, 
but this time in the opposite direction. In the market for 
precious metals one could purchase, for a pound of gold, not 
merely 15 or 16 pounds of silver, but 17, then 18, then 19, and 
in 1876 nearly 21 pounds of silver. In other words, silver had 
lost a fourth of its value compared with gold. It was hence- 
forth evident that every ingot of silver which constituted a 
silver coin underwent a proportionate depreciation. In 1876 
the gold value of 371.25 grains of fine silver (the amount 
contained in a silver dollar) was only 89 cents. 

Now people saw that if the coinage of the silver dollar had 
not been stopped by the law of 1873, the cheapened dollar 
might have come back into circulation and driven out gold. 
There arose a demand for the free and unlimited coinage of 
the silver dollar, and, yielding to the subsequent agitation, 
Congress in 1878 passed the " Bland-Allison Act." This act 
provided that the United States should purchase monthly 
not more than 14,000,000 and not less than $2,000,000 worth 
of silver bullion, to be coined into silver dollars of the pre- 
viously customary weight. These silver dollars were made 
full legal tender. Under this act the Treasury always pur- 
chased the minimum amount, and placed $378,166,793 in 
circulation between 1878 and 1890. Yet this law failed to 
raise the value of silver, for in 1889 the silver dollar was 
worth only 72 cents. 



AMERICAN METALLIC MONEY 245 

Iii 1890 the Bland-Allison Act was repealed and the 
" Sherman Act " passed. The new law required the Secre- 
tary of the Treasury to purchase monthly 4,500,000 ounces 
of fine silver bullion at the market price, which was not to 
exceed $1 for 371.25 grains. Treasury notes were issued 
in payments for this metal ; they were to be redeemable on 
demand in coin, and to be a legal tender in payment of all 
debts, except where otherwise expressly stipulated in the 
contract. But even these increased purchases of silver 
failed to sustain its price, which, after a brief rise, fell to 
60 cents in 1893. Between 1890 and 1893 the net exports 
of gold exceeded $150,000,000, in spite of the fact that 
our exports of merchandise greatly exceeded imports. The 
banks began to hoard gold and to pay their obligations 
in paper or in silver. The government was compelled to 
pay out large quantities of gold, while its revenues were 
composed chiefly of paper and silver. In 1893 the Sherman 
Act was repealed. At the present time the currency of the 
United States is the most heterogeneous to be found in any 
civilized country, although the act of March 14, 1900, was in- 
tended to somewhat systematize our monetary conditions, to 
make the gold dollar the standard unit of value, and to main- 
tain all other forms of money issued or coined by the United 
States at a parity with this standard. 1 

• The most striking lesson to be drawn from our monetary 
history — and the same is true of the monetary history of 
France, England, and Germany — is the constant change in 
the market value of the metals and the frequent recoinages and 
changes of system to which it has given rise. The concurrent 
circulation of the two metals can continue only so long as the 
market ratio coincides with the legal ratio. We are thus led 
to inquire : Must we be incessantly recoining first one metal 
and then the other, in order to fit their weights to varia- 
tions in the value, and thus preserve the necessary requisite of 
good money, namely, strict equivalence of intrinsic and legal 

1 Consult Horace White's " Money and Banking," 2d ed., Boston, 1902. 



246 PRINCIPLES OF POLITICAL ECONOMY 

value ? This seems to be the inevitable conclusion. But to 
attempt this would be manifestly impracticable and absurd. 1 

VIII. Why Bimetallist Countries really have but One Money 

As we have just seen in the account given of our own 
monetary history as a nation, every bimetallist system pre- 
sents the serious disadvantage of not being able to maintain, 
for both metals, that identity of intrinsic and legal value 
which should be the characteristic of all good money. Ac- 
cording to the variations in the value of the two metals, one 
or the other of them is incessantly becoming too heavy or 
too light. 

It may be thought, perhaps, that this disadvantage is 
theoretical rather than practical. " What does it matter," 
it may be asked, "if our gold or our silver coins have*a legal 
value a little above or a little below their real value ? No 
one notices it, and, in any case, no one suffers from it." 

This is a mistake. There is in such a condition of affairs 
a practical disadvantage, and, more than that, a real peril. 
The lighter money will gradually drive the heavier out of 
circulation, so that every country which is nominally under 

1 A little reflection will show that it would be sufficient to alter the weight 
of only one of the two moneys, and regard the other as the basis or unit. 
For instance : we might take the silver dollar as the unit and alter the 
weights of gold coins according to the variations in its value. But in spite 
of the simplification, this system would be almost as impracticable as the 
other. 

There is also the possibility of keeping a fixed weight for gold coins, 
without indicating their value, and hence permitting their value to oscillate 
freely according to the laws of demand and supply ; in some countries this 
plan is adopted, e.g. in Cochin China for the piaster. During the revolu- 
tionary period this system was proposed in France, and to-day some econo- 
mists regard it as the sole possible solution of the monetary problem. But 
then gold pieces would no longer be real money ; they would be nothing 
more than ingots which circulate like any other commodity. There would be 
a current price for gold coins just as for cotton and wheat, and it would 
be subject to the same variations. What complications such a system would 
introduce into business matters, facilitating all sorts of snares and tricks in 
dealing with the unsophisticated ! 



DIFFICULTIES OF BIMETALLISM 247 

the double-standard system falls, as a matter of fact, into the 
singular position of never being able to keep in circulation more 
than one kind of money, and tliis one always the worse. A 
regular movement of flux and reflux carries away the metal 
that is high in value, and brings into the country that which 
is low. This is indeed nothing more than the application of 
Gresham's law, of which our own monetary history is a con- 
clusive demonstration. In 1837, when gold fell in value, and 
in 1850, when it fell still lower because of circumstances 
mentioned in the preceding section, silver money continued 
to disappear and to be replaced by gold coins. The same 
thing took place in France under the second empire, when 
the so-called napoleons were widely circulated. People in 
France were not much accustomed to this money at that 
time ; it was greatly admired, and the courtiers of the period 
praised the wealth and glory of the new reign. In reality 
gold money was so abundant only because it was made of 
depreciated metal. 

The manner in which gold at that time became so abundant 
is explained very easily ; the following example should make 
the process comprehensible. The London banker who wanted 
to obtain silver to send to India naturally tried to get it where 
he could buy it cheapest. In London, for a kilogramme of 
gold he could purchase only 15 kilogrammes of silver. But 
by sending his kilogramme of gold to the Paris Mint he 
could receive 3100 francs in gold, and then exchange these 
3100 gold francs for 3100 silver francs, which weigh exactly 
15 1 kilogrammes. Thus for his kilogramme of gold he would 
obtain 15 \ kilogrammes of silver. 1 

1 The inverse operation was performed just as easily. A Paris banker could 
collect 3000 silver francs, weighing exactly 15 kilogrammes, and send them 
to London in exchange for one kilogramme of gold, — 1 to 15 being 
the ratio of market values. Then he would have his kilogramme of gold 
sent from London and coined at the Paris Mint into 3100 francs of gold. 
Thus the gross gain on the transaction was 100 francs, or more than 3 per 
cent. Even when the cost of coinage (seigniorage) and transportation was 
deducted, the transaction was still very profitable. 



248 PRINCIPLES OF POLITICAL ECONOMY 

It is easy to understand that this business led to the 
exportation of silver from France, and the importation of 
an equal quantity of gold money. This is precisely the way 
Gresham's law operates : heavy money is replaced by light 
money. Whole shiploads of silver coins were exported from 
France to India. They were bought for their weight in 
silver, to be sold to the Bombay and Madras Mints, and there 
converted into rupees. During this period these Indian 
Mints turned into rupees more than 2,000,000,000 francs of 
French money. 

It was not long before there was a veritable dearth of sil- 
ver money in France. In the old days, prohibitive measures 
would have been resorted to, and perhaps penalties would have 
been inflicted on those who exported silver money. But 
economic science, by pointing out the cause of the trouble, 
made it possible to suggest a more efficacious remedy. Sil- 
ver money was disappearing because it was too heavy; it was 
therefore necessary to diminish its weight or reduce its fine- 
ness, and thus, so to speak, clip its wings and make its flight 
abroad impossible. This step was taken, by common agree- 
ment on the part of France, Italy, Belgium, and Switzerland, 
on December 23, 1865. The standard of fineness for all sil- 
ver coins, except five-franc pieces, was lowered from nine- 
tenths to 835 thousandths, — a diminution in their value of 
more than 7 per cent. All these coins then became, and have 
since remained, token money ; according to the invariable 
principles which prevail in this matter, they have since that 
date lost their character of legal money. Why was an excep- 
tion made in favor of the five-franc piece ? There was no 
sound reason for this, but France insisted on the concession. 
To turn all silver coins into token money would have been 
entirely to abandon silver money as legal tender ; it would 
have been an out-and-out acceptance of the gold monometal- 
list system, as in England, and such a revolution in the 
monetary system terrified the French government. The 
five-franc piece therefore was kept, with its former weight 



BIMETALLISM IN FRANCE 249 

and fineness and character of legal money. Naturally it con- 
tinued to leave the country, but it could be dispensed with 
more easily than the smaller change ; if necessary, it could 
be replaced by the gold five-franc piece. 

From 1871 on, as we have seen, a reversal was effected in 
the respective values of the two metals, and the French mon- 
etary system was once more thrown out of order, this time in 
the opposite direction. Gold money became too heavy and 
consequently began to emigrate ; the silver became too light 
and began to increase in circulation. The operations ex- 
plained above were renewed, but in an exactly opposite 
manner and with opposite effects. In order that there shall 
be no obscurity upon this essential point, we shall repeat the 
explanation by describing this inverse operation. 

A Paris banker procured 3100 francs in gold, either in 
twenty-franc or ten-franc pieces. This sum made exactly a 
kilogramme of gold. He sent the money off to London, where 
one kilogramme of gold, in the market for precious metals, was 
worth 20 kilogrammes of silver. Our banker, therefore, 
bought 20 kilogrammes of silver, had them sent to Paris and 
turned into coin at the Mint. As the Mint coined one kilo- 
gramme of silver into 40 five-franc pieces, our banker received 
4000 francs in five-franc pieces ; his gross profit was 900 
francs. Deduct the cost of transportation, seigniorage, and 
the premium necessary for obtaining gold pieces if they have 
become scarce, and the transaction was nevertheless a profit- 
able one. Now it is evident that for France this business 
resulted in a decrease of gold money and an increase of sil- 
ver money. If continued long enough, the final result would 
have been the entire substitution of silver money for gold 
money in circulation. 

The nations belonging to the Latin Union (which Greece 
had joined in the meantime) in 1878 sought to avert this new 
danger. Just as in 1865 they had stopped the flight of sil- 
ver money by lowering its fineness, they could now have pre- 
vented the departure of gold money by lowering its fineness 



250 PRINCIPLES OF POLITICAL ECONOMY 

or diminishing its weight. But the frequent recoinage, first 
of one money, then of another, would have ended in the dis- 
organization of the whole monetary system. So it was thought 
advisable to resort to a simpler plan. The convention of 
November 5, 18T8, completely suspended the coinage of five- 
franc silver pieces. Henceforward the transaction described 
above became impossible ; there was no longer any profit in 
buying silver abroad, for it could no longer be coined into 
money in France. This measure, too, fully succeeded in pre- 
serving for France her fine supply of metallic gold, which had 
not yet been perceptibly drawn upon. But, obviously, this 
convention, which closed to silver a market of nearly 80,000,000 
persons and thus reduced its sale, hastened the depreciation of 
the metal ; in other words, it aggravated the evil. 1 Silver, 
which until then had lost but 10 or 12 per cent of its value, 
continued to fall until, in 1901, it possessed less than half its 
original value. 

Under these conditions, the free coinage of silver money 
has not been resumed by the Latin Union, and no one can 
tell whether it will ever be taken up again. We may there- 
fore say that although the nations of the Latin Union are still 
legally under a system of bimetallism, they have in reality 
adopted gold monometallism. Of all their silver coins, only 
one is legal tender, and this is the one that is no longer coined!' 2 ' 

IX. Whether it is Advisable to adopt the Monometallic 

System 

After the foregoing explanation, there seems to be no room 
for hesitation. The monometallic sj^stem is infinitely more 

1 Since then, many nations have abandoned the silver standard for the 
gold. (See the following section.) Even India in 1893 gave up the coinage 
of silver. All these circumstances have accelerated the fall in the value of 
silver, which in 1901 was, compared with gold, as 1 to 34.68. 

2 This somewhat lengthy account of the Latin monetary system has been 
reproduced here from the original French edition, because it is not only an 
excellent illustration of the principles involved, but also an interesting and 
very important chapter of monetary history. 



THE SPREAD OF MONOMETALLISM 251 

simple than bimetallism. It avoids all the difficulties that 
we have just enumerated. Then why not adopt it? 

That is what has been done by the greater number of 
nations : first England (1816), then Portugal (1854), Ger- 
many (1873), Norway, Sweden, and Denmark (1875), Fin- 
land (1878), Roumania (1890), Austria-Hungary (1892), 
Russia (1897), Japan (1897), and Peru (1897). The gold 
standard prevails also in Egypt and Turkey. All the South 
American countries except Bolivia and Paraguay have adopted 
it, but most of them are in reality under the regime of irre- 
deemable paper money. The only important countries hav- 
ing bimetallism are the United States, the Latin Union 
(comprising France, Italy, Belgium, Switzerland, and Greece), 
Holland, and Spain. The only countries of importance which 
have the silver standard are China and Mexico. The latter 
has the double standard in law but the single silver standard 
in practice ; the same is true of the Central American states, 
except Costa Rica, which has the gold standard. 

Of the bimetallist countries mentioned above, the principal 
ones are in reality gold monometallist, in the sense that they 
employ only gold for international exchange. Such is the 
case for the United States, France, and Holland. We have 
seen that it is a very feeble tie indeed which binds the Latin 
Union to a legal bimetallism that is little more than nominal. 
The same is true of the United States, where the friends of 
silver have endeavored to establish real bimetallism and to 
lead to its adoption by other nations. It was through their 
influence that the Sherman Act of 1890 was passed, obliging 
the government to purchase a large amount of silver each 
month. We have seen that this law was repealed in 1893 
and that the law of March 14, 1900, expressly states that the 
gold dollar is the standard unit of value, although the legal- 
tender quality of the silver dollar remains unaltered. 

Why do these nations not cut the tie that binds them so 
slightly to bimetallism, and adopt monometallism, as other 
nations have done ? There are two difficulties in the way of 



252 PRINCIPLES OF POLITICAL ECONOMY 

this step, one a practical matter of cost and the other a 
matter of principle. 

(1) The practical difficulty is that the adoption of the 
gold standard means the demonetization of silver. For if 
silver dollars are not legal tender, they must, at least in part, 
be withdrawn from circulation. It is estimated that there 
are in this country over 500,000,000 silver dollars, whose 
metallic value is less than half their legal value. Their 
withdrawal would therefore cost 1250,000,000, and proba- 
bly more, since such a measure as this evidently would cause 
a further fall in the value of silver. 1 

(2) The objection on principle is that fluctuations in prices 
are much more to be feared with a single standard of values 
than with a double standard. We know that every fluctua- 
tion in the value of money immediately results in an inverse 
fluctuation in prices. (See page 223.) When there is but 
one money, it is to be feared that these fluctuations will be 
frequent and abrupt, throwing the whole economic mechanism 
out of gear and continually provoking crises. 

When, on the other hand, two monej^s are used for the 
measurement of values, there arises a sort of compensatory 
influence of the two standards, which is very favorable to the 
stability of prices and therefore to the prosperity of trade ; 
for in business, stability is of the highest importance. It is 
somewhat difficult to explain this compensatory influence, but 
its main significance is not hard to grasp. 

Let us simply recall that the principal cause of the superior- 
ity of the precious metals as the measure of values consists 

1 It might be suggested that the government should let the holders sustain 
the loss. But this would hardly be honorable conduct on the part of the 
government, which has guaranteed the value of these coins by putting its seal 
upon them. As a matter of fact the silver dollars, not having met with much 
favor as a medium of exchange, do not circulate very extensively. Their place 
is taken by "silver certificates" which are redeemable on demand in coin 
deposited in the Treasury of the United States. These certificates, especially 
since the issue of 1886 in denominations of $1, $2, and $5, have a wide circu- 
lation ; the amount in circulation October 1, 1902, was nearly $460,000,000. 



MERITS OF BIMETALLISM 253 

in the fact that their variations in quantity are small when 
compared with the total amount in existence at any given 
time. (See page 217.) The degree of this superiority, due 
to stability of value, depends on the supply of the metal and 
the variety of sources which augment it. When this supply 
consists of two metals, it will necessarily be much larger to 
begin with. It is, moreover, highly improbable that the cir- 
cumstances which give rise to a great increase in the produc- 
tion of one metal will simultaneously cause a great increase 
in the production of the other ; hence variations in the total 
quantity will not be so great or so perceptible. Rises in the 
level of a river are unlikely to be sudden or dangerous when 
its tributaries are numerous, and situated in regions that are 
far distant from each other and entirely different in geologi- 
cal and climatic features. Similarly, it is better that our 
supply of metal be fed by two sources — gold and silver — 
than by only one. If there were three or four sources, that 
would be still better, and poly -metallism would be more 
desirable than ^i-metallism ! If in the fifties there had been 
but one monetary metal — gold — the discovery of gold mines 
in California and Australia would have caused the utmost dis- 
turbance through an enormous rise in prices. Indeed, such 
may some day be the effect of gold production in the Klon- 
dike and the Transvaal. The exhaustion of gold mines would 
cause an even more formidable perturbation. 

Whether prices are high or low does not matter much ; but it is 
of the highest importance that prices shall not rise or fall abruptly. 

It is also desirable that the value of money shall tend in gen- 
eral to fall rather than to rise, because a continual, gradual 
reduction of the power of money acts as a social equalizer; 
it stimulates the activhry of those that live on indepen- 
dent incomes, it relieves debtors, and it tends to diminish the 
advantage of persons having money over those that possess 
none. But when there is only one metal, it is probable that 
the value of money will, on the contrary, tend to rise. 

Bimetallists are not only unwilling to abandon the double 



254 PRINCIPLES OF POLITICAL ECONOMY 

staudard, but they also endeavor to convert the gold-standard 
nations, and maintain that none of the difficulties that are 
feared would arise if bimetallism were adopted by interna- 
tional agreement among the great powers, on the basis of 
16 to 1 or on the basis of any other fixed ratio. This 
assertion seems preposterous to the economists of the clas- 
sical school. They declare that the relative values of gold 
and silver do not and can not depend ne varietur on the will 
of any government, or even on the will of all governments com- 
bined, any more than the respective values of oxen and sheep, 
or of wheat and oats. The value of things is regulated solely 
by the law of demand and supply, and is wholly beyond the 
scope of legislative control. The precious metals, they assert, 
are no exception to the rule. 

In our opinion, this line of argument adopted by the clas- 
sical school requires some qualification. Gold and silver, 
being used principally for money, are not commodities that 
may be likened to oxen or sheep or any other merchandise. 
When, therefore, we speak of the demand for precious 
metals, we mean almost exclusively the demand made by a 
dozen or more government Mints. Hence there is nothing 
absurd in the supposition that if these dozen buyers should 
agree among themselves to fix the price of gold and of silver, 
they could succeed in so doing. If they declare that they will 
all buy gold at the rate of $240 per pound Troy, and silver 
at $15 per pound Troy, it is highly probable that they will 
impose this price on the market. The classical school says 
that it would be absurd to decree that an ox shall always be 
worth ten sheep, or that a bushel of wheat shall be worth 
the same as two bushels of oats ! Certainly it would ; the 
market for these commodities is immense, and each one of us, 
by his tastes and desires, helps to regulate the current prices 
of these goods. But if in the whole world there were only 
a dozen people who consumed beef or mutton, it is highly 
probable that by concerted action they could fix prices at 
the ratio of 1 to 10, or at any other ratio that pleased them. 



INTERNATIONAL BIMETALLISM 255 

Such a result as this is in fact accomplished, in spite of 
far less favorable conditions, by commercial speculators and 
large dealers, who combine with one another in trusts and 
similar organizations, and who sometimes arbitrarily deter- 
mine prices. 1 

No doubt this line of argument must not be carried to 
absurd extremes. It is manifestly not in the power of gov- 
ernments, even were they unanimous, to decree that the 
ratio between gold and silver henceforth shall be equality, 
or that it shall be reversed and that a pound of silver shall 
be worth more than a pound of gold. Such a decree would 
be a dead letter, because the industrial use of the precious 
metals, though less important than their use as mone} r , never- 
theless must not be neglected; this circumstance would be 
sufficient to prevent the choice of an extraordinary ratio. 
All the governments in the world could not make silver 
worth as much as gold ; men and women would never con- 
sent to pay as much for a silver ring as for a gold one. 2 

But within reasonable limits we do not hesitate to believe 
that an international agreement would be efficacious in 
determining the relative values of the two metals, and con- 
sequently in eliminating the principal disadvantage of bimet- 
allism ; namely, the disappearance of one of the two metals. 

1 We could give numerous proofs of the influence exerted by law on the 
prices of precious metals ; for instance, the stability of the ratio between the 
two metals during nearly three-quarters of a century in France ; or, contrari- 
wise, the fall of silver caused by its demonetization in Germany, later aggra- 
vated by the agreement that suppressed its coinage in the Latin Union, and, 
recently, its continued depreciation because of the discontinuance of silver 
coinage in British India. 

2 Let us add that if, upon this hypothesis, the values of gold and of silver 
were successfully maintained at the same level, the gold mines would soon 
be abandoned because the cost of production of gold is much greater than 
that of silver. Hence such a measure would cause the production of silver to 
increase very rapidly, whereas the gold mines would soon be abandoned be- 
cause they would bring no profits. Thus, sooner or later, the production of 
gold would cease. Similarly, if the law should declare that an ox shall be 
worth no more than a sheep, and this basis of values were successfully en- 
forced, we may be sure that no one would continue to raise oxen. 



256 PRINCIPLES OF POLITICAL ECONOMY 

For whither could it disappear, when in all countries it is 
subject to the same law ? 

Is such an international agreement as this practically pos- 
sible? That is another question. It does not appear so, in 
view of the fact that all nations seem to regard it as a mat- 
ter of national honor to adopt and maintain the gold stand- 
ard. Moreover, the nations that have adopted a legal ratio 
for the two metals did not establish the same ratio, — in 
Austria-Hungary it was fixed at 1 to 18.22, in Russia 1 to 
23.25, and in Japan 1 to 33 J. Besides, the English govern- 
ment, whose cooperation is regarded as indispensable, has 
always rejected the idea of international bimetallism. 

The best plan for the bimetallist countries appears to be 
the one they have adopted ; namely, the maintenance of the 
statu quo. About ten years ago, when the production of 
gold was decreasing rapidly, this policy involved some dan- 
ger. The question then arose whether there would be 
enough gold for all the nations desiring to employ it as their 
monetary standard, and whether those who delayed in adopt- 
ing it might not discover that they had entered the field too 
late ; but in the last part of the nineteenth century the 
output of gold increased very considerably, and there is 
every reason to believe that its increase will continue with 
a rapidity proportionate, or more than proportionate, to that 
of silver. 1 For this reason the difference in the value of the 

1 In ten years the annual production of gold has been tripled, princi- 
pally by the South African mines. The world's annual production, which 
in 1883 fell below $100,000,000, rose in 1899 to over $300,000,000. It is true 
that the South African War considerably reduced the output of the last few 
years ; but the construction of the great trans-Siberian railroad will proba- 
bly increase the output of the Siberian gold mines. The access to very rich 
but hitherto almost inaccessible gold deposits in Alaska is being facili- 
tated, and many auriferous districts are being discovered in various parts of 
Africa. The placer-gold yield of the Klondike (Yukon) increased from 
$2,500,000 in 1897 to $16,000,000 in 1899. 

The production of silver has of course also increased enormously, so that 
it is difficult to tell which of the two metals will fall more rapidly in value. 
(See page 228.) 



INTERNATIONAL BIMETALLISM 257 

two metals will probably decrease, and a change will take 
place opposite to that of 1870-1895. Hence the problem of 
bimetallism has lost much of its acuteness. There is no 
immediate peril for the bimetallist nations in remaining 
bimetallist, and if they should decide later to adopt gold 
monometallism, this step will be less difficult then than now. 
The solution of the monetary problem is every day becoming 
easier and less urgent. 

Yet as gold has become practically the sole international 
money, the bimetallist nations must see to it that they possess 
a sufficient stock. 1 If they fail to do this, they will be 
obliged to resort to the expensive process of purchasing gold 
with which to make payments abroad. (See the section on 
Foreign Exchange.) 

1 To attain this object, several countries (Russia a few years ago, and 
now Spain) require that customs duties be paid in gold coin. 



CHAPTER III — PAPER MONEY 

I. Whether Metallic Money can be replaced by- 
Paper Money 

Did we not already know that paper money could be sub- 
stituted for metallic money, we might have some difficulty 
in believing it possible, and the title of this section would 
cause some surprise. 

It is manifestly impossible to substitute for wheat or coal 
or wealth of any other kind mere pieces of paper on which 
are inscribed such words as " One Hundred Bushels of 
Wheat " or " One Hundred Tons of Coal." Such pieces 
of paper could not provide either food or warmth. If, more- 
over, we used coins merely to hang around our necks, as 
Oriental women wear their gold or silver sequins, even then 
our scraps of paper would be useless as substitutes for me- 
tallic money. But we know that money is unlike any other 
wealth, and that in our civilized societies its utility is not 
of a material nature. A piece of money is nothing but an 
" order " giving its possessor the right to claim, under cer- 
tain conditions, a share of existing wealth. (See page 220.) 
The part played by an " order " can be taken by a piece of 
paper quite as well as by a piece of metal. To the financier 
Law, whose premature experiments led France into bank- 
ruptcy, is due the credit of having perfectly understood and 
demonstrated this possibility. 

The subject will be clearer if we distinguish three kinds of 
paper money : — 

(1) Representative paper money is that which merely rep- 
resents an amount of coin that has been deposited some- 
where, — say in the safes of a bank. This kind of paper 

258 



KINDS OF PAPER MONEY 259 

money is thus secured by the coins for which the paper is 
simply a substitute. 1 Our American gold and silver certifi- 
cates, guaranteed by gold and silver deposits in the Treasury 
of the United States, are good examples of this kind of paper 
money. Gold coin, especially in large amounts, is cumber- 
some and difficult to handle ; hence the Secretary of the 
Treasury has been authorized to receive deposits of gold coin 
in sums of not less than $20 and to issue certificates therefor. 
These certificates are essentially receipts which show that so 
many dollars in gold coin have been deposited with the Treas- 
urer of the United States, and that the holder of the certifi- 
cate is entitled to receive them on demand. Gold certificates, 
however, are not legal tender, but are receivable for customs, 
taxes, and all public dues. On October 1, 1902, about $300,- 
000,000 worth of these certificates were in circulation. Silver 
is even more cumbersome than gold, and a plan for substitut- 
ing certificates was authorized by the laws of 1878, 1886, and 
1900. On October 1, 1902, about $160,000,000 worth of these 
certificates were in circulation. Like gold certificates, they 
are receivable for all public dues, but are not legal tender. — 
This form of paper money seems to present no difficulties. 

(2) Fiduciary paper money is that which takes the form 
of credit instruments. It is, properly speaking, a promise to 
pay a certain sum of money. It is evident that the value of 
the paper depends on the solvency of the debtor. If perfect 
trust can be placed in his ability to pay ; if, in other words, 
the signature and promise is reliable, there is no reason 
why this paper should not circulate as easily as money. We 
shall see that bank notes usually fall in this category, except 
in certain cases which we shall mention hereafter. The 

1 "One of the earliest mediums of exchange," says Jevons, "consisted of 
the skins of animals. The earliest form of representative money consisted of 
small pieces of leather, usually marked with an official seal. It is a very rea- 
sonable suggestion that when skins and furs began to be found an inconven- 
iently bulky kind of money, small pieces were clipped off, and handed over 
as tokens of possession. By fitting into the place from which they were cut, 
they would prove ownership." 



260 PRINCIPLES OF POLITICAL ECONOMY 

"national banks" of the United States issue money of this 
sort, guaranteed by government bonds deposited with the 
Treasurer of the United States. There were, on October 1, 
1902, national notes in circulation to the amount of over 
1350,000,000. 

Fiduciary money (or, as it is sometimes called, redeemable 
or convertible money), when issued by the government, is 
secured only by the general solvency of the treasury depart- 
ment, and not by a specific deposit, dollar for dollar. Presi- 
dent Hadley says : " Experience proves that this is not nearly 
so safe a reliance as that on which the coin certificate is 
based. ... At the very best, there is danger that the assets 
on which the government relies for the payment of such notes 
will fail in an emergency. . . . The assets of the government 
are, for the most part, permanent investments of a kind which 
it is not easy to sell at short notice. When a fiscal emer- 
gency arises, the dangerous power, possessed by the legis- 
lature, of declaring such notes a legal tender even if they are 
not redeemed, is a constant menace to financial stability." 1 

(3) Conventional paper money represents nothing and con- 
fers a claim to nothing. The name " paper money," in its 
strict sense, is generally confined to this category. It con- 
sists of strips of paper issued by a government having insuffi- 
cient metallic money. These strips of paper, to be sure, bear 
such inscriptions as " Ten Dollars " or " Twenty Dollars," 
and thus, like the preceding kinds of paper money, have the 
appearance of promises to pay certain sums of money. But 
every one knows that this is pure fiction, and that the gov- 
ernment will never redeem these promises, because it has no 
money for that purpose. 

Conventional paper money (also called irredeemable or 
inconvertible paper money because there is no provision on 
the part of the government to redeem it or exchange it for 
coin) may be regarded as money on which the government 
has charged approximately a hundred per cent seigniorage, 
i A. T. Hadley, "Economics," page 191. (Putnam, 1898.) 



INCONVERTIBLE PAPER MONEY 261 

This kind of money either is issued as such directly by the 
State, or is the result of the degeneration of money that was 
originally convertible. Convertible money sometimes loses 
the quality of convertibility, or possesses it only to a limited 
extent, and thus becomes inconvertible. "The paper may be 
declared to be redeemable in coin ; that promise may even be 
borne upon the surface of the paper ; but if provision be not 
made so that, in fact, every holder of a note can obtain coined 
money therefor at will, the paper is inconvertible. No paper 
money is convertible, the full, immediate and unconditional 
redemption of which is not, at all times, within the choice of 
the holder." 1 

It is especially in this third form that the substitution of 
paper money for metallic money seems hard to understand ; 
certainly it is not a very simple matter. It has, however, 
frequently been accomplished in many countries ; experience 
has amply proved that the substitution is possible, and that 
the public will readily submit to the process. Russia and the 
South American Republics have applied this system for many 
generations. Why should they not? If, by the decree of the 
lawgiver and the consent of the public (which to a certain 
extent is always necessary for the -acceptance of legislative 
decrees), these strips of green, white, or blue paper have the 
power to pay for goods, to liquidate debts, and to pay taxes, 
why should they not circulate just as well as white or yellow 
coins ? Do they not serve the very same purposes as coins ? 

Yet we must admit that between the value of paper money 

1 Francis A. Walker, "Political Economy," page 153. 

The "greenbacks" and "confederate notes" issued during the Civil War 
are examples of this kind of paper money. For seventeen years, i.e. from 
1862 to 1879 the greenbacks were not worth their face value ; in 1864 it 
took two dollars and eighty-five cents of paper to buy one dollar of gold. 
The government did not begin to redeem them until 1879. 

The step from putting out promises to pay that are not redeemable, to 
issuing paper that the government does not even pretend to redeem, is an 
easy one, and many are the governments which have taken it. Money of the 
latter sort is called fiat money. In the colony of Rhode Island, for instance, 
the issues read as follows : "This bill shall be equal to money." 



262 PRINCIPLES OF POLITICAL ECONOMY 

and that of metallic money there will always be several im- 
portant differences. The value of the former is always more 
precarious, more restricted, and more changeable. We shall 
briefly explain each of these three defects. 

(A) The value of paper money is precarious because it is 
dependent on the will of the legislator and can be annihilated 
as well as created by law. Should the law demonetize paper 
money, the holder will have in his possession nothing but 
bits of paper, for when paper money has lost its legal value 
it has lost all. The same thing is not altogether true of 
metallic money ; for besides its legal value it has also a natu- 
ral value due to the physical and chemical properties of the 
metal it contains. Doubtless if gold and silver were de- 
monetized in all countries, 1 metallic money would lose the 
greater part of its value. Let us not be deceived in this 
respect. The fall in the value of silver money, caused by 
its demonetization in several countries, is more than sufficient 
proof of our assertion. 2 Nevertheless, even though this 
hypothesis be true, the precious metals would still possess 
a certain utility, because they could be employed for in- 
dustrial purposes ; and as this employment of them would 

1 We say " in all countries " because if it were demonetized in only- 
one, there would be no perceptible decrease in its value. This is the 
circumstance that offers the holder of metallic money the greatest security. 

2 Many economists, however, harbor an illusion in this respect, or, at least, 
do not put their readers on their guard against it. Most of them imply that 
the government seal impressed on gold and silver coins merely indicates their 
value in much the same way that store-keepers put a mark on goods. But 
the declaration that the 232.20 grains of fine gold and 25.80 grains of alloy 
constituting our "eagle" are worth ten dollars, not only is declaratory 
of value but also determinative of value. These metals have acquired the 
larger part of their value because the will of the legislator, ratified (as it 
were) by the will of society, has chosen gold and silver as money ; they would 
lose half, and probably more, of their value, as soon as this sanction or this 
ratification should cease to exist. Aristotle very clearly perceived this, when 
he said, in the " Nicomachean Ethics," Book V : "It was by virtue of a volun- 
tary agreement that money became the instrument of exchange. ... It is 
called i>6nia/Aa, from the word v6/xos, signifying law, which indicates that it is 
founded, not on nature, but on convention ; and that human laws, which 



DEFECTS OF PAPER MONEY 263 

increase with the fall in their value, it is possible that the 
decline in value would be smaller than we anticipate. Sup- 
pose that the metals fell to a third or a fourth of their present 
value. The holder of metallic money then would still possess 
a certain amount of value of which no law could deprive 
him, and this amount would probably be higher than it could 
have been, had any other commodity been chosen as legal 
money. 

(B) The value of paper money is more restricted, that is to 
say, its circulation is limited to a narrower area than metallic 
money. As its value is conferred upon it by the laws of a 
particular nation, it cannot be expected to circulate beyond 
the boundaries of that nation. 1 It cannot, therefore, be 
employed in international exchange. The value of metallic 
money, on the other hand, being determined by that of the 
metal it contains, is approximately the same in all civilized 
nations. Therefore it can circulate everywhere, — if not as 

have thought fit to employ it as a measure of value, may, at pleasure, set 
this use of it aside, and employ some other measure in its stead." 

But we must not therefore conclude, as some economists (notably Cernu- 
schi) have done, that the value of the precious metals is purely conventional. 
In order that any object shall have a recognized utility and value, it is of 
course necessary that the will and choice of men be directed toward this ob- 
ject ; but human will and choice are in this case determined by natural 
causes, and therefore the resulting value is also natural and by no means 
purely conventional. The choice of men in singling out the precious metals 
for this purpose was not arbitrary, but due to definite qualities which the 
precious metals possessed, and which we have already pointed out. Even 
wheat owes its value to the fact that most civilized men have chosen this 
cereal among all others as their staple food ; and if ever they substituted 
another, we may say that the value of wheat would decline. But no one 
would therefore maintain that the value of wheat is purely conventional. 
It is the same with the precious metals. The only difference is that it is 
easier to use something else as money, than to find a food to substitute for 
wheat. 

1 It is of course true that American paper money will be accepted by 
bankers abroad, or by foreigners who are familiar with our currency. But in 
this case it is received not as money properly speaking, but as an instrument 
of credit, i.e. with the intention of having it cashed, just as a note signed by 
Rothschild would be accepted in any country. 



264 PRINCIPLES OF POLITICAL ECONOMY 

coined money, at least as bullion. This is the reason why 
metallic money is essentially a universal and international 
money, while paper money is essentially national. 

(C) Finally, the value of paper money is more changeable 
than that of metallic money, for the excellent reason that the 
quantity of paper money depends solely on the will of the 
government, while the quantity of metallic money depends 
on natural resources, — principally on the discovery of new 
mines. The former, therefore, is issued by man, the latter 
by nature. An imprudent, careless government can depre- 
ciate paper money by issuing more than is needed, and 
too often this is exactly what occurs. But no government 
on earth can depreciate metallic money in this manner. 
Supposing that the government is prudent enough to issue 
only a limited quantity of paper money, this cannot remove 
the disadvantage to which we refer, inasmuch as the need 
for money varies from time to time and according to circum- 
stances. It frequently happens, for example, that a period 
of great business activity requiring an increase in the in- 
struments of exchange is followed by a period of depression. 
There may have been no change in the amount of money ; 
yet in the first period there will probably be a dearth, while 
in the second period there is liable to be an excess of paper 
money. 

It is true that the discovery of exceptionally rich gold 
and silver mines may at any time throw a large amount of 
precious metals on the world's market, and thus cause a fall 
in the value of metallic money. It is also true that when a 
period of depression follows a period of great activity, even 
the metallic money which has been drawn into a country may 
prove to be excessive in amount. This has occurred more 
than once. But these variations are never so great as those 
clue to changes in the quantity of paper money. The pre- 
cious metals are sought and accepted everywhere, and if they 
are in excess in one country they naturally flow into others. 
Sudden increases in the amount of paper money, however, 



IS PAPER MONEY WEALTH? 265 

being always confined within the limits of one nation (which 
may be regarded as a reservoir from which there is no out- 
let), always have disastrous consequences. 

The above three disadvantages, which render paper money 
so imperfect an instrument when compared with metallic 
money, would vanish almost entirely if all civilized countries 
should bind themselves : — 

(1) To confer the legal tender quality on only one kind of 
money, — paper money which shall be accepted everywhere. 

(2) Not to augment its quantity, or, to augment it only in 
a measure fixed in advance and calculated for each nation, — 
perhaps according to the increase of its population. 

In this case the value of paper money, though still con- 
ventional or artificial, would rest on almost as broad a basis 
as the value of metallic money itself, because it would be 
founded on the unanimous consent of all nations. As its 
quantity would be regulated according to scientific forecasts, 
and not by mere chance, its value would probably be subject 
to little variation. Indeed, it is likely that the money of the 
future will be of "this kind. 

The fact that paper money is artificial money is by no 
means a sign of inferiority. Quite the contrary ! A watch 
is an artificial instrument for measuring time, while the sun 
is a natural instrument; this circumstance does not prevent 
the former from being, for this purpose, superior to the latter. 
It is even a characteristic feature of progress that natural 
instruments are replaced by artificial ones : the rude club 
by the rifle, the horse by the locomotive, sunlight by electric 
light, the warmth of the sun by artificial heat. 

II. Whether the Creation of Paper Money is equiva- 
lent to the Creation of Wealth 

The men who first conceived the idea of making paper 
money 1 flattered themselves that they were increasing the 

' 1 We do not know who invented paper money. It was known in China 
from time immemorial. Marco Polo described it on his return from that 



266 PRINCIPLES OF POLITICAL ECONOMY 

general wealth, just as if they had discovered a gold mine or 
accomplished the magnum opus of which the ancient alche- 
mists had dreamed, namely, the transmutation of the baser 
metals into gold. 

This idea was evidently absurd, for it assumed that wealth 
can be created out of nothing. Yet the idea has been ridi- 
culed too much, inasmuch as it is perfectly true that the 
emission of paper money can to some extent increase the 
wealth of a nation. How can it do this ? Adam Smith first 
offered an explanation. He observed that the metallic money 
circulating in a country is unproductive capital, and that the 
substitution of paper money, by removing this capital from 
commerce and making it available for other uses, permits its 
application to productive purposes. In a comparison that 
has since become celebrated, he declared that to do away 
with metallic money would be like doing away with roads; 
if we found the means of travelling in the air, we could 
restore to cultivation and production all the surface of the 
earth that is now devoted to transportation by land. 

Adam Smith's ingenious comparison, however, leaves some 
obscurity in our minds. We can see readily enough that when 
roads and railways are no longer required, the land they oc- 
cupy may be cleared and put under cultivation ; but it is not 
so easy to see what can be done with metallic money when it 
is dispensed with for currency purposes. Will it be melted 
down and made into gold and silver plate or jewelry ? That 
would be but little economic gain. What would really result 
is this : the money would be invested abroad, and thus bring 
considerable revenue. The United States, for example, now 
has a capital in the form of gold and silver coins amounting 
to over 11,500,000,000. Half of this is stored in the govern- 

fabled country in the fourteenth century. Antiquity has left us several 
specimens of money (if not of paper, at any rate of leather) having a purely 
conventional value ; this was called siege money because it had been issued 
usually in beleaguered cities to take the place of metallic money which was 
becoming scarce. 



THE ECONOMY OF PAPER MONEY 267 

ment treasuries and is represented in circulation by the cer- 
tificates to which we have already referred. This enormous 
capital undoubtedly facilitates trade ; but it yields no profit. 
Suppose now that we find a means of substituting paper money 
for these coins ; then we should have all this metallic money to 
invest abroad, either by purchasing stock, railway shares, land, 
and ships, or by improving and extending foreign industry 
and agriculture. These investments would, in one way or 
another, produce 4 or 5 per cent interest, and thus result in 
an increased annual revenue of $60,000,000 to 175,000,000. 

Such a plan as this may be compared to that of a house- 
holder who, in possession of several thousand dollars' worth 
of silverware, decides that porcelain would serve him quite 
as well, and therefore sells his silver in order to increase his 
income by employing the proceeds productively. The same 
line of conduct is pursued by those industrious persons who, 
realizing that money does not yield any profit while lying 
idle in their pockets or in their safes, keep no more of it in 
their houses than is absolutely necessary, and invest all the 
rest. The wealthiest persons are often those who have 
the least money at home. While the thrifty peasant has 
a drawer full of gold and silver coins, the millionnaire has 
simply a check-book with which to pay for his purchases. 

The same thing is true of nations. While France employs 
$ 1,600,000,000 in metallic money, England, more accustomed 
to the use of credit devices than France, employs about 
$600,000,000 in coin. Yet England cannot be said to be 
poorer than France. 

v When, therefore, the question is asked, " Does it lie within 
the power of a government or a bank to increase the wealth 
of a country by issuing paper money?" it is not perfectly 
correct to answer with an unqualified negative. As a matter 
of fact, the thing is feasible , paper money may increase the 
wealth of a nation by the total amount of metallic money in 
circulation. The replacing of $1,500,000,000 of United 
States coin by an equal amount of paper money would 



268 PRINCIPLES OF POLITICAL ECONOMY 

actually increase our wealth by that amount ; but it would 
not be increased a cent more. The limit here indicated, 
moreover, is a theoretical one ; in practice it would be daring 
to go quite so far as this. 

But it must be observed that the gain could not be made 
by all countries at the same time. One country could utilize 
its supply of metal productively by selling it abroad. But 
if every country wished to do this, it is evident that none 
would succeed ; gold and silver specie, offered by all coun- 
tries seeking to get rid of it, and demanded by none, would 
be a drug on the market and would lose their value. 1 

Nevertheless, even accepting this very improbable hypoth- 
esis as true, there would still be some advantage to man- 
kind in abandoning the use of precious metals as money. 
For there would henceforth be a saving of all the labor that 
is devoted to the maintenance of the supply of metals, — the 
labor of mining, of turning the bullion into coin, of filling up 
the voids caused each year by abrasion and accidental losses, 
and of keeping up the supply at a level that is required by 
an ever increasing population. This labor is no small item. 
The extraction of ore from the mines, smelting, transporta- 
tion, coinage, etc., are operations that demand the labor of 
many thousand workers. Do away with metallic money, and 
all these laborers will be available for production along other 
lines, and the total productive power of humanity will really 
be increased to this extent. 

In short, then, we see that the answer to the question at 
the head of this section is quite different from that formerly 
given. We must no longer say that paper money in- 
creases the wealth of a nation to the extent that it increases its 
supply of money, but, on the contrary, to the extent that it 
permits of reducing its supply of metallic money. 

1 It is in this respect that Adam Smith's comparison is faulty. For if we 
discovered a means to dispense with roads, the result would be different : 
all countries could simultaneously benefit from the use of land that had pre- 
viously been devoted to transportation but which then could be used produc- 
tively. 



DANGERS OF PAPER MONEY 269 

Such is the economic advantage that a nation may obtain 
by the emission of paper money. If now we ask what is the 
fiscal advantage resulting from its emission by a government, 
the matter is more simple. When a government falls short 
of money, the creation of paper money is a very convenient 
way to pay its contractors, its employees, and its expenses, 
without being obliged to borrow, and consequently without being 
required to pay interest. When a government is in this pre- 
dicament, its credit is probably not of the best, and if it were 
obliged to borrow at interest the rate would be very high. 
Therefore paper money effects a saving that is not to be 
despised. 1 Many governments have resorted to this expe- 
dient, and have in general succeeded well enough, provided 
of course that in their issues they did not exceed the limit 
we have laid down, fixed by the amount of coin in circulation. 
Every issue which goes beyond this limit must cause a fall 
in prices, and result in a loss to the government and the 
nation compared with which the economy due to the use of 
paper money is a mere bagatelle. 

III. The Dangers resulting from the Use of Paper Money, 
and the Way to Prevent Them 

The advantages that paper money can procure for a coun- 
try or for a government are real enough, but they may be 

1 During the Franco-Prussian War the French government had need of 
money, and issued notes to the value of $300,000,000. If it had borrowed 
this sum, it would have been obliged to pay about 6 per cent interest, or 
$18,000,000 a year, whereas the issue of paper money involved no expense 
but the cost of manufacture. But instead of issuing the paper directly, the 
French government chose, for valid reasons, to use the intermediary services 
of the Bank of France, for which it paid 1 per cent commission, amounting 
to only $3,000,000 a year. For the nation, this issue of paper money was 
very acceptable, because (on account of exportation and hiding) there was 
insufficient money in circulation. Thus the issue of these notes was a benefit 
both for the government and the public. But the amount issued was not 
enough, for when several private banks formed an association to issue frac- 
tional notes of a value less than five francs, the public was glad to accept 
them. 



270 PRINCIPLES OF POLITICAL ECONOMY 

dearly paid for ; indeed, they may cost more than they are 
worth. Some economists have gone so far as to say that 
paper money is the greatest plague of nations, and that it is 
more injurious to society than a terrible disease is to an individ- 
ual. 1 It must be noted, however, that the evil effects are due 
rather to the imprudence of governments than to the nature 
of paper money itself. 2 Indeed, they are produced only when 
a government, overstepping the proper limit, issues more than 
is needed. The need may be measured fairly well by the 
amount of metallic money generally in circulation. Never- 
theless, impecunious governments are sorely tempted to go 
beyond this fatal limit; many have done so, and have ended 
in bankruptcy. 3 

It may safely be asserted that in the present state of 
economic science there is no excuse for a government over- 
stepping the limit. There are several signs, familiar to the 
economist and the financier, which should warn us of the 

1 While the paper-money experiment was going on during the revolution- 
ary period of American history, Mr. Pelatiah Webster declared that "We 
have suffered more from this than from every other cause of calamity ; it 
has killed more men, pervaded and corrupted the choicest interests of our 
country more, and done more injustice, than even the arms and artifices of 
our enemies." 

2 Experience has taught that when paper money is issued through the in- 
termediary of banks, and not directly by the government, it is usually done 
far more carefully and involves less danger. This is due to the fact that 
bankers are more vigilant in defending their own interests and those of their 
stock-holders, than the Government Treasury is in defending the interests of 
the public. Hence most governments have issued money through the banks. 
(See the section on Differences between Bank-notes and Paper Money.) 

3 Every student of history knows the lamentable story of the French 
assignats issued by the Convention and the Directory to the enormous 
amount of 45,000,000,000 francs, which was probably twenty times the 
amount of coined money then in France. Even had these issues consisted 
of good gold and silver pieces, they would nevertheless have caused a great 
depreciation of metallic money, since the amount in circulation would have 
been twenty times what was required. We can imagine, then, what must 
have been the depreciation of this paper money ! In February, 1796, the 
hundred-franc ($20) assignat fell in value as low as seven cents, and a 
pair of boots sold for 4000 francs ($800). 



SIGNS OF DEPRECIATION 271 

danger, even when it is far off, and which are surer indica- 
tions than the pilot obtains from sounding-lead and land- 
marks. 

(1) The first of these signs is the premium for gold. As 
soon as paper money has been issued in quantities too great 
for the needs of a community, it begins (by virtue of the uni- 
versal law of value) to be depreciated ; the first effect of this 
depreciation, the first sign that indicates what is coming, — 
although the general public may not be aware of it, — is that 
metallic money begins to command a premium. Metallic 
money is not affected by this incipient depreciation of the 
monetary system. Why should it be ? Gold and silver re- 
tain their former value. Bankers and money-changers begin 
to seek bullion to send abroad, and they will pay a small pre- 
mium to obtain it. This is the time for a nation's financiers 
to keep their eyes open ! 

(2) The second sign is a rise in the rate of exchange. Bills 
payable abroad, i.e. foreign bills of exchange, are sold in all 
the great commercial centres of the world. Like any other 
commodity, they have a market price that is quoted at the 
stock-exchange ; this is called the rate of exchange. These 
bills, or claims on foreign countries, are always payable in 
gold or silver, — generally in gold, because gold is the inter- 
national money. If, for example, the United States is under 
a paper-money system and its paper begins to be depreciated, 
bills on London or on Paris will rise in price just like gold 
itself, since they are in fact equivalent to gold. When, there- 
fore, our ten-dollar gold piece commands a premium of 2 per 
cent and is sold for $10.20, a hundred-dollar bill of exchange 
on London will rise to an equal premium and will sell for 
$102. (See the section on the Rate of Exchange.) 

(3) The third sign is the flight of metallic money. How- 
ever slight the depreciation of paper money may be (and un- 
less this defect is immediately remedied by the withdrawal of 
the excessive paper), all the metallic money will speedily dis- 
appear from a country. This phenomenon is invariable and 



272 PRINCIPLES OF POLITICAL ECONOMY 

therefore characteristic ; it occurs in all countries where 
paper money has been issued in excess. This is what hap- 
pened in Russia, and in all the states of South America, 
which are, nevertheless, gold and silver mining countries. 
The reasons for this, which we explained when dealing with 
Gresham's law, need not be repeated here. 

(4) The fourth sign is a rise in prices. This appears 
later on, and shows that the evil has already become a grave 
one, and that the permissible limit has been greatly exceeded. 
While the depreciation of paper money is still slight, say 
2 or 3 per cent, prices (except those of the precious metals) 
are not affected. Retail dealers, and even wholesale deal- 
ers, will not alter prices for so trifling a difference as this ; 
and even if they do so, the public will not worry about it. 
But whenever the depreciation of paper money reaches 10, 
15, or 20 per cent, then all tradesmen and all producers raise 
their prices correspondingly. 1 The evil, which until then 
had been latent, suddenly bursts forth and is revealed to all. 

(5) Finally, we must note that the old prices continue the 
same for those persons who can pay in metallic money, if 

1 Business men and producers are not opposed to this rise in prices ; they 
become accustomed to it so readily that they approve of the paper-money 
system and oppose its abolition, because that would result in a return to the 
old prices. When the United States was under a paper-money system, there 
was an important political party, significantly called inflationists, which did 
everything in its power to maintain that system. At the present time there 
is a similar party in the Argentine Republic. (For the explanation of these 
facts, see page 229.) 

As paper money, especially that which is for any reason inconvertible, 
rises or falls in value almost constantly, prices will be constantly changing. 
If a manufacturer or merchant does not know what the price of his goods will 
be a week ahead, he is cut off from any legitimate estimate of his coming 
receipts or expenses, and is obliged to guess at the course of the market. 
Speculators who think that the rise in prices will continue, purchase large 
stocks of goods in order to sell out when the rise comes. This may create 
an excessive demand, tending to advance prices still further. Although all 
prices have risen, there are many people who believe that when prices rise 
they are richer than before; they are worth more in "dollars," but they 
overlook the fact that dollars will now buy much less than before. (See 
J. L. Laughlin, "Elements of Political Economy, 1 ' page 167.) 



AMERICAN PAPER MONEY 27 



9 



there is any of it left. For metallic money has lost none 
of its former value ; on the contrary, compared with paper 
money it has gained. Hence we observe the curious phe- 
nomenon of two different sets of prices for commodities. 
Every article now has two prices, one payable in metallic 
money, the other in paper money. The difference between 
the two prices exactly measures the depreciation of the 
paper money. Thus, for example, in Russia an article 
that sold for eight roubles in paper would bring only five or 
six roubles in silver, because of the depreciation of Russian 
paper money. ■ 

As soon, therefore, as a government perceives the premoni- 
tory signs, namely, a premium for gold and a rise in the rate 
of exchange, 1 its first duty is absolutely to forbid the emis- 
sion of any more paper money, since the extreme limit has 
already been reached. If this limit has unfortunately been 
overstepped, and we discover the ominous symptom of double 
prices, it must endeavor to retrace its steps and destroy the 
paper money that returns to the public treasury, until there 
is the right amount in circulation. Such an heroic remedy 
as this, however, involving the partial suppression of the 
national revenue, is not within the power of all governments. 
They cannot resort to it unless they can afford to sacrifice 
a part of their revenue ; in other words, the public revenue 
must be in excess of public expenditures. 

IV. American Paper Money 

The experience of our own country with paper money of 

all kinds has been sufficient to serve very appropriately as an 

illustration of the principles underlying this department of 

economic science. 

1 When at the close of the war of 1870 France was under the paper- 
money system, and all its gold went into Germany to pay the war indemnity, 
gold immediately rose to a premium of 2J per cent (fifty centimes on a 
twenty-franc piece). That was not a great rise, but it was enough to put the 
government on its guard, and the danger was averted. 



274 PRINCIPLES OF POLITICAL ECONOMY 

The first government paper to circulate as money in this 
country appears to have been the " bills of credit " issued by 
the colony of Massachusetts in 1690 to the amount of <£40,- 
000, in order to pay the colonial troops for a disastrous mili- 
tary expedition against Canada. As the public treasury was 
empty and the soldiers refused to wait, these bills were issued 
in anticipation of the tax collections ; they were not payable 
at any particular time, they did not bear interest, and were 
not legal tender. As they did not pass for more than twelve 
or fourteen shillings in the pound, the soldiers lost two-fifths 
of their dues. In 1692 the bills were made legal tender in 
all payments, receivable for taxes at 5 per cent better than 
silver, and redeemable in silver at the end of twelve months. 
These provisions made them as good as silver. 

The idea of issuing paper money, once introduced, spread 
to all the other colonies like an epidemic. In many instances 
the opposition of the royal governors to the introduction of 
" bills of credit " contributed to the irritation against the 
mother country which culminated in the Revolutionary War. 
Down to the founding of the union, the paper-money party 
in each of the colonies, largely made up of debtors and spec- 
ulators, endeavored to secure an abundance of cheap money. 
The lower houses of the colonial legislatures were controlled 
by a body of insolvent debtors. 1 One of the commonest 
ways of increasing the issues of paper was the alleged re- 
placement of old and worn bills, which often meant an issue 
so large as to leave a margin for general expenses, and some- 
times a very large margin. Reports which were made from 

1 Their methods are thus characterized by Thomas Paine, writing in 1786 : 
"There are a set of men who go about making purchases upon credit and 
buying estates that they have not wherewithal to pay for ; and having done 
this their next step is to fill the newspapers with paragraphs of the scarcity 
of money and the necessity of a paper emission, then to have legal tender 
under the pretence of supporting its credit, and when out, to depreciate it as 
fast as they can, get a deal of it for a little price and cheat their creditors ; 
and this is the concise history of paper-money schemes." " Writings," Vol. 
II, p. 178. 



COLONIAL PAPER MONEY 275 

time to time to the home government in response to inquiries 
regarding the amount of bills outstanding, were ingeniously 
prepared so as to convey false impressions, whenever, indeed, 
they answered these inquiries at all. Horace White has 
summed up the usual course of events where these bills of 
credit were issued, as follows : (1) Emissions ; (2) disap- 
pearance of specie ; (3) counterfeiting ; (4) wearing out of 
bills ; (5) calling in and replacing worn and counterfeited 
issues with new ones ; (6) extending the time for old ones 
to run, especially those which had been placed on loan ; (7) 
depreciation ; (8) repudiation of early issues in part and the 
emission of others, called " new tenor." 

When popular governments have once started the conven- 
ient process of issuing paper money, there seems to be no 
hope of arresting it. Bad as the colonial bills of credit were, 
those of the revolutionary period were worse. The Conti- 
nental Congress had need of money but no means of raising 
it. Therefore it had recourse to the expedient of issuing 
paper money, to be redeemed by the states, — which never 
did redeem it. Pelatiah Webster was almost the only man 
of prominence to insist upon taxation as the only legitimate 
means of raising money for the war. But the popular 
sentiment was entirely opposed to this, and one delegate to 
the Congress voiced the general feeling when he asked with 
unspeakable scorn why he should vote to tax the people, 
when a Philadelphia printing press could turn out money by 
the bushel. In the summer of 1775 " due bills " for $3,000,000 
were issued, which, at the suggestion of Congress, were 
declared by the colonies to be legal tender. From this time 
forward, the issues of " continental " paper currency — so 
called to distinguish it from the money issued by the separate 
colonies — followed in rapid succession, until 1241,000,000 
had been issued by 1779. To prevent depreciation it was 
deemed necessary to fix the prices of merchandise by law 
and to prohibit selling merchandise at higher prices for paper 
than for silver. Severe punishments were inflicted for this 



276 PRINCIPLES OF POLITICAL ECONOMY 

offence, but by 1777 the depreciation was too great to be 
ignored, and a little later the Continental paper became so 
valueless as to give rise to the characteristic expression " not 
worth a continental." 2 

In May, 1781, Congress recommended that the states 
should repeal their legal-tender laws. All of them subse- 
quently adopted " scales of depreciation " for the settlement 
of debts. These were tables showing how much the money 
was worth in specie at various times, and how disputed 
accounts should be settled. The tables were notoriously 
incorrect. The one recommended by Congress placed the 
currency at par in September, 1777, whereas it was worth at 
that time only 33 cents on the dollar. August 4, 1790, 
Congress granted authority for funding the bills in 6 per 
cent bonds " at the rate of one hundred dollars in the said 
bills for one dollar in specie." Only 17,000,000 turned up to 
take advantage of this provision. 

After the establishment of the union a number of states 
plunged afresh into debauchery of paper money. 2 Despite 
the common sense displayed by a few men, such as Thomas 
Paine, who emphatically asserted that " money is money and 
paper is paper," the advocates of paper money triumphed in 
many of the states and succeeded in passing laws imposing 
severe penalties on persons that refused to accept the paper. 
Meanwhile the paper declined steadily in value, and landowners 
who had covered their farms with mortgages made haste to lift 

1 " Washington said it took a wagon-load of money to buy a wagon-load of 
provisions. At the end of the year 1778 the paper dollar was worth sixteen 
cents in the northern states and twelve cents in the south. Early in 1780 its 
value had fallen to two cents, and before the end of the year it took ten 
paper dollars to make one cent. In October, Indian corn sold wholesale in 
Boston for $150 a bushel, butter was $12 a pound, tea $90, sugar $10, beef 
$8, coffee $12, and a barrel of flour cost $1575. Samuel Adams paid $2000 
for a hat and a suit of clothes." — Fiske, "The American Revolution," Vol. II. 
In Philadelphia a barber papered his shop with bills, and a dog was led up 
and down the streets covered with a coat of continental paper money. 

2 McMaster, in Vol. I of his "History of the People of the United 
States," describes the paper-money agitation in the states at this time. 



GREENBACKS 277 

them by paying the depreciated but lawful money. As the 
sums were sometimes large and the money bulky, it was fre- 
quently carried in handkerchiefs, and occasionally in pillow- 
cases. 

For a time the financial problems facing the national gov- 
ernment apparently did not call for renewed experiments 
with paper money, and at the beginning of the Civil War, in 
1861, the currency of the United States consisted of gold coins, 
subsidiary silver, minor coin, and state bank-notes. In 1862, 
after unwise action by the Treasury Department had forced 
the banks of the country to suspend specie payments, i.e. to 
refuse to meet their obligations in coin, Congress passed a 
law authorizing the issue of $150,000,000 of United States 
notes, not bearing interest, payable to bearer, of denomina- 
tions not less than $5 each. They were to be legal tender 
in payment of all debts, public and private, except duties 
on imports and interest on the government debt. A few 
months later another act authorized the issue of 1150,000,000 
more of these notes, so crying were the needs of the Treas- 
ury for funds to carry on the war. The total amount finally 
reached 1150,000,000. 

But these notes or "greenbacks," as they were called, 
immediately depreciated. In 1864 each note was worth only 
49 per cent of its face value, and ultimately fell to 35 cents 
per dollar. As the government was obliged to pay higher 
prices for everything, the cost of the Civil War was nearly 
11,000,000,000 more than it would have been otherwise. 
The notes were originally made convertible, at the option of 
the holder, into bonds bearing interest in coin at 6 per cent. 
But this connecting link between the notes and gold was 
unwisely repealed in 1863. If it had remained in force, the 
notes would have been exchanged for bonds whenever the 
price of the latter was above par, and specie payments would 
probably have been resumed soon after the close of the war. 
As a matter of fact these notes were not really redeemable 
in coin until 1879. 



278 PRINCIPLES OF POLITICAL ECONOMY 

Two other kinds of legal-tender notes were issued during 
the war. They were called " Treasury notes " in contradis- 
tinction to the United States notes or "greenbacks." On 
March 3, 1863, Congress authorized the issue of §400,000,000 
of Treasury notes of denominations not less than $10, to run 
not more than three years, to bear interest not exceeding 6 per 
cent paj^able in " lawful money," i.e. in either gold or United 
States notes. They were to be legal tender for their face 
value, excluding interest. The object of this law was to 
obtain loans from small investors without increasing the cur- 
rency. Anybody having $10 for which he had no immedi- 
ate use could buy a Treasury note for that sum. He would 
be impelled to hoard it for the sake of the interest, but if 
necessary he could use it as money for its face value, 
in which case the recipient would be impelled to hoard 
it. Under this act $44,520,000 of one-year notes, and 
$166,480,000 of two-year notes, bearing interest at 5 per 
cent, were issued. A portion of these notes had inter- 
est coupons attached to them, which could be cut off 
and collected as the interest matured. These were found 
to be troublesome, since they caused alternate contraction 
and expansion of the currency. When the accumulated 
interest was sufficient to make it worth while for the owner 
to keep them they would be hoarded, and when the coupon 
was cut off they would be put in circulation. They were 
paid off by the government and cancelled as soon as possible. 

Under this act also there were issued $266,595,440 of 
compound-interest notes to run three years. The rate of 
interest was six per cent, compounded semi-annually, and 
the interest was payable with the principal at maturity and 
not otherwise. On the back of the note was printed a state- 
ment showing its value at the end of each six months. This 
was the most scientific form of legal-tender notes issued dur- 
ing the war, since it offered a continuing inducement to the 
owner to hold them as an investment instead of putting 
them in circulation. 



POSTAGE CURRENCY 279 

In the summer of 1862, when the silver subsidiary coins 
grew scarce because of the depreciated greenbacks, people 
began to use postage stamps as a substitute. The demand 
for stamps became greater than the Post Office Department 
could supply ; the stamps, moreover, were inconvenient to 
use. Accordingly, Congress issued small notes to take the 
place of the stamps, consisting of strips of paper bearing the 
facsimile of postage stamps. This was called " postage cur- 
rency." By a later act, fractional currency was issued in 
the form of promissory notes of the United States for sums 
less than one dollar. These notes were small and easily 
worn out and lost ; the largest amount in circulation at any 
time was 127,000,000. 

Of particular interest to the economist, however, is the 
endeavor, made in 1864, to keep down the price of gold (for 
which the greenbacks had steadily been increasing the pre- 
mium) by legislative enactment. Secretary Chase induced 
Congress to pass a bill " to prohibit certain sales of gold and 
foreign exchange." The law, based on the belief that 
brokers had caused the price of gold to advance, imposed 
heavy fines and penalties upon all those who should violate 
it. But the measure remained on the statute book only two 
weeks. On the day it passed, gold was quoted at 198. The 
next day it was 208, the next 230, and in a few more days, 
250. Whereupon Congress repealed the act without debate. 

Another matter of essential interest and importance is the 
effect of this depreciated legal-tender paper on wages. Pro- 
fessor Taussig maintains that " money wages responded with 
unmistakable slowness to the inflating influences of the Civil 
War. In 1865, when prices stood at 217 as compared with 
100 in 1860, wages had only touched 143. The course of 
events at this time shows the truth of the common statement 
that in times of inflation, wages rise less quickly than prices, 
and that the period of transition is one of hardship to the 
wage-receiving class." 1 
1 Paper read before the International Statistical Institute at Chicago, 1893. 



280 PRINCIPLES OF POLITICAL ECONOMY 

Congress voted in December, 1865, in favor of the early 
resumption of specie payments. In pursuance of this design, 
in April, 1866, it passed a law for retiring and cancelling the 
legal-tender notes at the rate of 11,000,000 a month. But in 
February, 1868, this act was repealed, after §41,000,000 had been 
retired. In 1873 the Treasury Department reissued $26,000,- 

000 of the retired notes. Later Congress voted to resume 
specie payments on January 1, 1879. Since then the notes 
have always been redeemed in gold coin whenever presented 
to the subtreasury in New York. Subsequently it was pro- 
vided that the notes should not be retired when redeemed, 
but should be paid out and kept in circulation. At that 
time the amount outstanding was 1346,681,016, and it has 
remained at that figure ever since. A permanent gold fund 
for the redemption of these notes was indirectly established 
by the act of 1882, which provided that "the Secretary of 
the Treasury shall suspend the issue of gold certificates 
whenever the amount of gold coin and bullion in the Treas- 
ury reserved for the redemption of the United States notes 
falls below $100,000,000." 1 

V. How even Paper Money may be Dispensed With 

Although paper money economizes metallic money, this 
advantage, as we have seen, is obtained only at the price of 
serious disadvantages and even of great dangers. If, there- 
fore, it were possible to find some way to economize metallic 
money without resorting to so dangerous an expedient as 

1 For the information contained in this brief sketch of our paper money 

1 am indebted principally to Horace White's " Money and Banking," second 
edition, 1902. Other literature of which use was made, and to which the 
student may be referred, is as follows : McMaster, " History of the People 
of the United States" ; Fiske, "The American Revolution" ; A. S. Bolles, 
"Financial History of the United States" ; Phillipps, " Historical Sketch of 
American Paper Currency" ; Felt, "Historical Account of Massachusetts 
Currency " ; A. M. Davis, " Currency and Banking in the Province of Mas- 
sachusetts Bay " ; J. H. Cuntz, " Our Money as It Is " (Vol. VII, No. 6, of 
"Sound Currency").— C. W. A. V. 



BILLS OF EXCHANGE 281 

paper money, this would undoubtedly be a great benefit. 
Now there is such a way as this,- and it is more effective as 
well as less dangerous than paper money. It consists not in 
replacing a costly instrument of exchange by another that 
costs nothing at all, but simply in doing away with every in- 
strument of exchange. We may explain the operation of 
such a scheme in the following way. 

In the first place: We replace cash sales, i.e. the exchange 
of commodities for money, by sales on credit, i.e. the ex- 
change of commodities for a promise to pay at some future 
date. Credit sales are in reality nothing more than this: 
I give you my commodity, and receive in exchange for it 
your promise to pay, represented by a note or by a bill of 
exchange. 1 

In the second place : Once these promises to pay have been 
made, we seek to have them fulfilled in some other way 
than by actual payment in metallic money. Jurisprudence 
suggests various methods of accomplishing this ; for example, 
what the jurists call compensatio (by means of which two 
exactly opposite and equivalent claims or obligations coun- 
terbalance each other), or confusio (when one party is at 
the same time both creditor and debtor), or novatio (when 
one promise to pay is extinguished by making a new promise). 

The extreme complexity of social relations and the fact 
that each of us — or at any rate each producer — is in turn 
both buyer and seller make it a very easy matter to apply 
such devices as these to facilitate payments. 

It was first of all in international commerce, in exchange 
between countries, that men learned to employ credit and to 
dispense with the direct use of money. The difficulty and 
danger of transporting large quantities of money over great 
distances led the Lombards, it is believed, to invent the bill 
of exchange. The foreign bill of exchange, indeed, is the first 
form of negotiable paper known to English law. When 

1 For the understanding of this section the reader should refer to the 
chapter on Credit. 



282 PRINCIPLES OP POLITICAL ECONOMY 

originally used in the thirteenth century, it was only in 
dealings between merchants of different countries ; but in 
the seventeenth century inland bills of exchange came into 
use between merchants in different parts of England. 

A bill of exchange or draft (of which frequent mention 
will be made hereafter) is a written order by which the 
person drawing the bill orders some other person, upon 
whom he has a claim, to pay a specified sum of money to a 
third person. These bills are payable either at sight or at 
some specified time. It is not necessary that the person to 
whom they are given shall present them himself for payment. 
They may by indorsement be transferred from one person to 
another. In this manner one bill may serve to make many 
payments before the drawee is called upon to make final pay- 
ment. The utility of these bills is most manifest in foreign 
exchanges, and may perhaps best be made clear by an 
example. 

Suppose that American wheat dealers have sold to England 
$2,000,000 worth of wheat at six months' credit; that is 
to say, instead of receiving money from England they have 
drawn bills of exchange to the value of $ 2,000,000 upon their 
English debtors. Now suppose, furthermore, that English 
manufacturers of cutlery have sold $2,000,000 worth of 
knives and forks to American dealers on similar terms and 
have drawn an equal amount in bills of exchange payable in 
the United States. When the American purchasers of cut- 
lery wish to pay for the goods bought from England, will 
they send $2,000,000 in coin across the sea? Certainly not. 
They will simply purchase from the American wheat dealers 
the $2,000,000 worth of bills of exchange payable in Eng- 
land; they will then send these bills to their English cred- 
itors in place of money, saying, "Collect these sums from 
your fellow-countrymen." It will not be difficult for them to 
procure these bills of exchange, for, as we shall see, there are 
persons called bankers who make it a business to buy and 
sell them, i.e. persons who buy paper payable abroad, in 



BILLS OF EXCHANGE 283 

order to sell it to those that require it. The use of such 
bills avoids the manifest absurdity of sending two shipments 
of coin across the ocean, one to England and the other to 
America. 1 

It is true that our example supposes that the two countries 
are indebted to each other for exactly the same amount, — 
a supposition that is very unlikely to hold true. But although 
it is not directly true, the same result may nevertheless be 
reached in a roundabout way. Let us grant, for instance, 
that the United States has purchased $2,000,000 worth of tea 
from China, but sold nothing in return. The above kind of 
compensation then seems impossible. Shall we not in this case 
be obliged to send $2,000,000 in coin to China? Perhaps not. 
Although we may have sold nothing to China, there are 
probably other countries that have sold goods there, and that 
are consequently creditors of the Chinese. All we need to 
do is to buy their claims on China. When we shall thus 
have become creditors of the Chinese, nothing will be easier 
than to balance our accounts with them. It is possible, for 
instance, that England has sold China $2,000,000 worth of 
cotton cloth. In this event we should only have to buy 
England's claim upon China for this sum ; or, to put it tech- 
nically, we might purchase, at London, paper payable on 
Shanghai or Hong Kong. But it may be objected that in 
any case we shall be obliged to pay $2,000,000, and that it 
matters little whether we pay it to England or to China. 
This, however, is an error. It matters very much whether 
we owe to China or to England, for in the latter case it 
is only requisite that we shall ourselves have a claim of 
$2,000,000 against England (perhaps for wheat we have sold 
her) in order to balance accounts for all three nations, per- 
haps without the payment of a single dollar in money. 

Without such ingenious devices as this, international trade 

1 Brief but clear explanations of the legal nature and significance of bills 
of exchange may be found in White's "Business Law" and Burdick's 
" Essentials of Business Law." 



284 PRINCIPLES OF POLITICAL ECONOMY 

would be impossible. If the United States, for instance, were 
obliged each year to pay in cash for the 1900,000,000 worth of 
goods which we import, whence could we obtain this enor- 
mous amount of money? There is not enough metallic 
money in the whole country to enable us to pay in cash for 
our imports during twenty months. In reality, the amount 
of money that is sent from one country to another is never 
more than a small fraction, — 10 per cent at the most — of 
the value of merchandise exchanged. 

In the transaction of business between individuals we are 
by no means so far advanced. Yet exchanges between indi- 
viduals could be effected by means of the same system as that 
used between nations, namely, selling on short credits, creat- 
ing bills of exchange, and passing them from person to person 
until they are counterbalanced by each other. Suppose, for 
instance, that I am a lawyer, and that one of my clients, who 
is a wine-merchant, owes me money. Instead of paying me, 
he gives me his note. When I want to pay my book-dealer, 
I can give him this note in payment. If it should happen 
that my book-dealer gets his wine from the same wine-mer- 
chant, it is a very simple matter for him to use this note in 
payment. 1 

1 Here is a fuller illustration : In the same town let there be three persons, 
whom we will call A, B, and C. Let us suppose that A is a creditor of B's, 
B a creditor to the same amount of C's, and C in his 
turn a creditor of A's. This is shown by the accom- 
panying diagram. 

Is it not clear that, instead of having the sum of 
money owed by the three debtors respectively to their 
three creditors pass through a complete circuit, it 
would be far simpler to settle the whole transaction 
without paying a cent in cash ? We may be told that 
it is highly improbable that C should be a creditor 
of A's, and should, as it were, be purposely placed where he is, in order 
to close the circle. No doubt it is improbable. But if C is not a creditor 
of A's, he will stand in that relation to D, E, F, G, or H, etc., until we 
finally come to a man who in his turn is a creditor of A's, and then the 
problem is solved. The more persons there are in the operation, the better 
chance there will be of closing the circle. 




THE SYSTEM OF BOOK CREDITS 285 

But we can conceive another method, infinitely more sim- 
ple in theory and easier to understand. Suppose that all our 
citizens have opened an account at the same bank, and that 
it is the business of the bank to register everybody's sales by 
giving him credit for the respective amounts, and everybody's 
purchases by marking them to his debit. Accounts then 
might be balanced by means of book credits and book debits. 
Such a system as this would dispense entirely with money. 
Every time I made a purchase, instead of paying the store- 
keeper I should authorize the bank to place the necessary 
sum to my debit and to the storekeeper's credit. The latter, 
in turn, would do likewise whenever he had occasion to make 
any purchases. 

If, instead of buying goods, I want to make an invest- 
ment, the process would be just the same: the bank would 
enter to my debit the sum representing the value of the 
stock, and an equal value to the credit of the company which 
issued it, or the former holder who transferred it to me. 
At the end of the year the bank would send a statement 
to each person, indicating his account for the year, and dis- 
closing a balance in favor either of the banker or the client. 
If the latter is the case, the surplus is credited to the 
client ; if the former, it is debited. It is evident that, theo- 
retically, under such a system as this all business transac- 
tions could be settled by means of book credits. 1 

1 The term book credit is usually applied not to the accounts kept by bank- 
ing establishments, but to accounts kept by dealers themselves. Our use of 
the term is an extension of its application. "If two firms have frequent 
transactions with each other, alternately buying and selling, it would be an 
absurd waste of money to settle each debt immediately it arose, when, in a 
few days, a corresponding debt might arise in the opposite direction. Accord- 
ingly, it is the common practice for firms having reciprocal transactions to 
debit and credit each other in their books, with the debt arising out of each 
transaction, and only to make a cash payment when the balance happens to 
become inconveniently great." (Jevons, "Money," page 251.) The term 
book credit is generally confined to this sort of operation. 



286 PRINCIPLES OF POLITICAL ECONOMY 

VI. How Improvements in Exchange tend to bring us Back 

to Barter 

The processes just described call our attention to a curious 
tendency in modern economic life. Clearly, the present ten- 
dency, as Stanley Jevons remarked, is to do away with the 
instrument of exchange and bring us back to the direct 
exchange of commodity for commodity, i.e. to barter. 
There is, indeed, in the ingenious and complicated processes 
which are the latest result of economic evolution, a curious 
resemblance to the primitive methods of uncivilized societies. 
This is not the only respect in which the historical develop- 
ment of nations displays the strange phenomenon that human 
thought, having reached the end of a certain line of progress, 
returns, as it were, to its starting-point, and thus describes 
one of those great circles which so vividly impressed the 
imagination of Vico. Progress moves in a circle, or it at 
least appears to suggest a rising spiral. 1 

Is not international trade now really carried on by barter? 
Each country pays for most of its imports by means of its 
exports ; in other words, it exchanges its own products for 
foreign products. (See the following section, page 301, 
note 1.) 



i 



An analogous phenomenon attracted our attention when discussing the 
role of merchants (page 207). We observed that social evolution gave rise 
first to a class of merchants whose function it was to facilitate relations 
between consumers and producers ; then we remarked that the same evolu- 
tion tended to-day to eliminate this class of merchants and to bring us back, 
by means of simple and more effective methods, to direct contact between 
consumer and producer. Again, cooperative association was one of the first 
forms of production; yet many regard it as the industrial form of the 
future. 

The other social sciences offer quite as striking examples of the same prin- 
ciple: e.g. direct government by the people in antique cities reappears in 
the guise of the referendum in our modern constitutions ; obligatory military 
service for all citizens is bringing European nations back to the state of things 
which preceded the institution of permanent mercenary armies. 

Yet the contrary thesis is upheld by Massart, de Moor, and Vandervelde in 
their book on "L'Evolution regressive." 



CHECKS 287 

The introduction of such an arrangement as that outlined 
above, by which all citizens have accounts at the same bank, 
would be tantamount to a system of barter, since under it 
everybody would be paying for the products or services of 
others with his own products or services. 

It is virtually a kind of barter that makes the check system 
and the great institution of the clearing house possible. Their 
nature and working is comparatively simple. 

There was a time when merchants kept their money in 
their own strong-boxes and paid it out as occasion happened 
to require. But in the course of time, goldsmiths obtained 
the privilege of keeping this money in their vaults, subject 
to the demands of the owner ; and instead of paying money 
from their own safes whenever they made purchases, mer- 
chants would simply give their creditors an order on the 
goldsmith, calling upon the latter to pay the requisite amount 
to the bearer of the order. These orders or checks, the im- 
portance of which has steadily increased with the develop- 
ment of trade, now serve very extensively as a substitute for 
money. A check may be defined as an order on a bank to 
pay some one a specified sum of money. It can be drawn 
only against a deposit of money in the bank, or against a 
credit previously agreed to by the banker. By means of the 
check the depositor transfers a part of his deposit or his 
credit to the person to whom the check is payable. 

Suppose that A purchases fifty dollars' worth of goods 
from B, and pays with a check for that sum ; B, in turn, 
buys fifty dollars' worth of goods from C, and uses a check 
in payment ; C buys fifty dollars' worth of goods from D 
and pays in the same manner as A and B. If all these 
checks are drawn on the same bank, the matter is perfectly 
simple. Each person in possession of a check will deposit 
it at the bank, and although total business to the amount of 
$ 150 has been transacted, it will only be necessary for fifty 
dollars ultimately to change owners. D will be fifty dollars 
richer than before, whereas A will be fifty dollars poorer. 



288 PRINCIPLES OF POLITICAL ECONOMY 

B and C may be regarded as having merely exchanged goods 
for goods, as under a system of barter. 

Now suppose that each of these persons has an account at 
a different bank. The recipient of the check in each case 
need not hurry off to the bank upon which it is drawn; 
he simply deposits it at his own bank, and is credited for 
the amount of the check. In the course of a day's busi- 
ness each bank in this manner receives a great variety 
of checks drawn upon all the banks of the neighborhood, 
and, sometimes, checks that are drawn upon distant banks. 
Then the representatives of the various banks meet at 
the clearing house and balance their claims against each 
other. It will be found, in the example mentioned above, 
that B's bank has a claim of fifty dollars against A's bank, 
that C's bank has a claim of fifty dollars against B's bank, 
and that D's bank has a claim of fifty dollars against C's 
bank ; but all that is necessary is for A's bank to pay fifty 
dollars to D's bank. In reality the matter is likely to be 
even simpler than this, for each bank has a multitude of 
claims against the other banks, and when all these claims are 
compared little money need be paid to balance them. If a 
bank sends to the clearing house checks to the amount of 
$20,000 and finds there checks drawn against itself to the 
amount of $22,000, the bank will be indebted to the clearing 
house for $2000, which balance it will have to pay in money. 
If, on the other hand, the checks drawn upon this bank had 
amounted to $18,000, the bank would have received the 
balance of $2000 from the clearing house. In this manner 
different banks very conveniently settle all their mutual 
obligations by merely paying the balances against them, or 
receiving balances due them, at the clearing house. Banks 
situated in different places settle their accounts with almost 
equal ease. Banks in country districts have agents, or corre- 
sponding banks, in the nearest clearing-house city, so that 
every clearing house performs this work of settling accounts 
for banks of the adjacent territory. Then the New York 



CLEARING HOUSES 289 

clearing house acts as a central clearing house for the banks 
of the entire country, since every important city bank corre- 
sponds with some New York bank that is a member of the 
clearing house. In 1902 the total transactions of the clear- 
ing houses of the country amounted to $116,021,618,003. 
The New York clearing house effected $78,130,693,507.97 of 
these transactions, the daily average being $265,793,423.21, 
while the amount of money actually used to effect this vol- 
ume of business was but four and one-half per cent of that 
sum. 

Thus the clearing house really reverts to a sort of barter. 
These huge bundles of checks, bills of exchange and negoti- 
able paper, which day by day are exchanged for each other, 
simply represent innumerable boxes, bales, barrels, and car- 
loads of all kinds of merchandise which have been exchanged 
for each other. For those who look behind the mere appear- 
ance of things, the clearing house is a colossal bazaar, like 
those which exist among African tribes or which existed in 
the cities of antiquity. The only difference is that here 
not the goods themselves are exchanged, but the certificates 
that represent them. 

The precious metals, to be sure, although they are losing 
their position as instruments of exchange, still retain their 
function as the measures of value, for it is plain that the 
value of all these papers, checks, bank-notes, etc., is ulti- 
mately based on metallic money. Only, this basis is from 
day to day becoming more narrow, when compared to the 
enormous edifice of credit that has been built upon it. The 
present system has been likened to a pyramid, resting upon 
its apex and constantly growing larger. It has also been 
compared to a top turning with enormous rapidity on a 
metallic point, so that its equilibrium is fearfully unstable ; 
as soon as the top ceases to turn, it falls. 1 

1 Mr. Vanderlip, former Assistant Secretary of the United States Treasury, 
has recently given what he called a conservative note of warning with refer- 
ence to the inflation of credit liabilities in this country. These liabilities, he 



290 PRINCIPLES OF POLITICAL ECONOMY 

Nor can we be certain that, even as a measure of value, the 
precious metals will not some day lose their privileged rank. 
We can readily conceive a social state in which the unit of 
value serving as the basis for sales and purchases will be 
purely nominal, and will correspond to no particular piece of 
money in circulation. Money of account of this kind has fre- 
quently been employed : the mark banco of the mediaeval 
bankers, the livre tournois under the "ancien regime" in 
France, and the modern English guinea are not represented 
by any coin. 

Only when money has become a pure abstraction shall we 
fully attain the social state described in the preceding section 
of this book, namely, the system under which all receipts 
and payments are effected by a thorough system of book- 
keeping embracing the exchanges of all members of the 
community. 

declared, have in the last five years increased $4,000,000,000. There has 
been an increase of $1,300,000,000 in the deposits of the national banks alone 
during the last two years, while the basis of gold and legal tender has slightly 
decreased. This increase of bank liabilities and bank credits has been caused 
in a great measure by the conversion of the ownership of industrial establish- 
ments into shares and bonds, that is, into bank collateral. 



CHAPTER IV — INTERNATIONAL TRADE 



I. The Balance of Trade 

The term balance of trade designates the relation between 
imports and exports. Statistics show that the imports and 
exports of a country are rarely equal. The balance of trade 
is either in favor of exports or of imports ; that is to say, a 
nation exports more than it imports, or imports more than it 
exports. The latter case is the more frequent. The United 
States, however, since 1893 has always imported less than it 
exported ; we have, in other words, had what is called a 
"favorable balance of trade." During the last five fiscal 
years of our foreign commerce the value of merchandise 
exported and imported was, in round figures, as follows : — 



Year 


Exports 


Imports 


1898 


. $1,231,000,000 


$616,000,000 


1899 


. 1,227,000,000 


697,000,000 


1900 


1,394,000,000 


850,000,000 


1901 


1,488,000,000 


823,000,000 


1902 


. 1,382,000,000 


903,000,000 


Totals 


. $6,722,000,000 


$3,889,000,000 



These figures indicate that during a period of only five 
years the United States has sold to foreign countries 
82,833,000,000 worth of goods more than it has bought from 
them ; this is equivalent to an average annual excess of ex- 
ports over imports amounting to more than $566,000,000. 
Must we therefore conclude that foreign nations are every 
year obliged to pay us, on an average, more than half a bill- 
ion dollars in money ? This is scarcely probable, for the 
amount of money circulating in this country has not in- 
creased perceptibly. A good test of the validit}^ of the as- 
sumption that foreign nations pay us this enormous amount 

291 



292 



PRINCIPLES OP POLITICAL ECONOMY 



annually is furnished by the statistics of gold and silver 
imports and exports. (We have already learned that in 
international trade paper money is of no avail, and that 
international engagements must be met in gold and silver.) 
The official statistics for gold and silver exports and imports 
during the last five fiscal years show, in round numbers, the 
following totals : — 



Tear 


Exports 


Imports 


1898 


$71,000,000 


$151,000,000 


1899 


84,000,000 


120,000,000 


1900 


105,000,000 


80,000,000 


1901 


117,000,000 


102,000,000 


1902 


98,000,000 


80,000,000 


Totals 


$475,000,000 


$533,000,000 



The excess of imports over exports during this period 
was -$58,000,000, or an annual average of little more than 
$11,000,000. Thus it would appear that we are annually 
selling an excess of $566,000,000 worth of merchandise to 
foreign nations, and receiving $11,000,000 in gold and silver 
in payment for this excess. Such a conclusion is manifestly 
absurd. Evidently, drawing conclusions with regard to the 
prosperity of a nation after a mere glance at its "balance 
of trade " is not quite so simple a matter as is sometimes 
supposed. 

Let us now consider France as an example of the opposite 
state of affairs. Here are the figures for her special com- 
merce 1 during the five years from 1897 to 1901, in round 
millions : — 



Year 


Exports 


Imports 


1897 


$720,000,000 


$791,000,000 


1898 


702,000,000 


895,000,000 


1899 


831,000,000 


904,000,000 


1900 


822,000,000 


940,000,000 


1901 


833,000,000 


943,000,000 


Totals 


. $3,908,000,000 


$4,473,000,000 



1 General commerce means all imports and exports without exception, 
while special commerce includes only those commodities that have been pro- 



THE BALANCE OF TRADE 



293 



Thus in a period of only five years France purchased 
abroad $565,000,000 worth of goods more than she sold, 
which amounts to an annual excess of imports over exports 
of $113,000,000. Must we conclude from these figures that 
France is annually obliged to pay this amount of money to 
foreign countries ? The most superficial observation demon- 
strates that the amount of money in circulation there has 
not diminished. It has even increased. The statistics re- 
garding the exports and imports of gold and silver for the 
same period as that considered above are as follows : — 



Tear 


Exports 


Imports 


1897 


$65,000,000 


$94,000,000 


1898 


100,000,000 


78,000,000 


1899 


76,000,000 


101,000,000 


1900 


67,000,000 


121,000,000 


1901 


57,000,000 


105,000,000 


Totals 


$365,000,000 


$499,000,000 



The supply of gold and silver money in France, therefore, 
has increased during this period by $134,000,000, i.e. nearly 
$27,000,000 annually. 

If we consider the case of England, the statistics are still 
more surprising. 1 The annual excess of imports over ex- 
ports averages $1,200,000,000. In other words, one year of 
foreign commerce at this rate would suffice to drain the 

duced within the country, or will be consumed there ; thus special commerce 
does not include goods that simply pass through the country or that remain 
there temporarily. Special commerce is necessarily less extensive than gen- 
eral commerce. In France the difference between the two is more than 
$400,000,000. In some countries (such as Switzerland) it is proportionally 
even greater than this because of their geographical position. The extent of 
special commerce indicates the forwarding trade in which a nation engages. 
The Netherlands and Belgium each derive large profits from the forwarding 
trade. 

1 For the year 1901 the imports of the United Kingdom amounted to 
$2,540,265,299, whereas the exports were valued at $1,362,728,893, — a dif- 
ference between the two of $1,177,536,406. 

Doubtless the official figures are not exactly correct ; the money that 
travellers carry with them, for instance, is not included. But as the errors 



294 PRINCIPLES OF POLITICAL ECONOMY 

country twice of all its metallic money ; for the United 
Kingdom has but 1600,000,000 in coin of all kinds. Yet 
this money is by no means drained from the country by 
foreign trade. On the contrary, here, as in France, the im- 
ports of precious metals surpass the exports. 

What, then, is the key to the enigma ? Simply this : In 
order to ascertain whether the foreign trade of a country is 
in equilibrium, we must consider not only the balance of its 
imports and its exports, — as the public is accustomed to 
doing, — but the balance of its credits and its debits. Now 
the balance of credits and debits (or the balance of accounts') 
is not the same as the balance of trade. To be sure, expor- 
tation is one way, and the chief way, of making foreign 
countries our debtors. Yet there are other ways of doing 
this. Similarly, though imports constitute our principal 
debt to foreign nations they are not the sole source of our 
indebtedness to them. What, then, are these international 
claims or debts, distinct and different from exports and im- 
ports, which have aptly been termed invisible exports and 
imports ? They are numerous, but three of them stand out 
prominently in importance : — 

(1) The cost of transportation of exported goods, i.e. 
freight and insurance. If the exporting country has charge 
of the transportation of its goods, it has a claim on other 
countries that certainly will not be counted among its ex- 
ports, inasmuch as the claim arises only after commodities 
have left the home port and are on the way to their destina- 
tion. On this account, England has large claims against 
other nations, estimated at more than 8440,000,000 per an- 
num ; for England not only carries all her own exports, but 
also transports a large share of the goods of other countries ; 

or omissions are probably about the same on the side of imports as on that of 
exports, they do not much modify the general result. 

Additional proof that the amount of money in France has not decreased 
may be found in the amount of cash reserves held by the banks. The Bank 
of France, for example, which thirty years ago had about $200,000,000 in 
cash on hand, now has three times that amount. 



THE BALANCE OP ACCOUNTS 295 

and she certainly does not perform this service gratuitously. 1 
The United States, on the other hand, pays foreign nations 
for transportation and insurance, more than $200,000, 000 
annually. France pays annually to foreign nations about 
•170,000,000 for the same service, since she transports in her 
own vessels only half her exports and one-third of her 
imports. 2 

(2) The interest on capital invested abroad. Rich coun- 
tries, and, as a rule, old countries, invest abroad a large part 
of their savings, and for this reason receive each year large 
amounts of money or of commodities from foreign nations. 
These receipts usually take the form of stock coupons, shares, 
debentures, farm rents, and profits in industrial and commer- 
cial enterprises. The tribute that England in this manner 

1 The increased value of merchandise due to the cost of transportation 
explains the following fact, which at first sight appears inexplicable : When 
we add the imports and exports of the whole world, and compare the total 
imports with the total exports, we find that imports are much greater than 
exports. In the year 1901, for example, the value of the world's imports 
was about $10,300,000,000, while the total value of exports during the same 
period was about $8,800,000,000. Now if, instead of comparing the values 
of imports and exports, we compare the quantities, it is evident that the two 
totals must be equal, inasmuch as there cannot be (for the world as a whole) 
more goods arriving than have been sent away, unless, forsooth, their quan- 
tity has increased while on the way to their destination ! As a matter of fact 
some goods are lost under way because of shipwrecks, waste, etc., and it is 
therefore very probable that the amount of goods arriving is less than that 
which was sent. But as the above estimates consider values instead of 
quantities, and as values increase under way precisely because of the cost 
of transportation, it is not surprising that the goods imported (i.e. which 
reach their destination) possess a greater value than those exported (i.e. 
which are taken from their starting-point) . 

2 The report of the United States Commissioner of Navigation gives the 
following information regarding the tonnage of the merchant navies of the 
principal maritime nations in 1902 : Great Britain, 15,546,897 ; United 
States, 5,797,902 ; Germany, 3,138,568 ; Norway, 1,632,757 ; France, 1,519,922 ; 
Italy, 1,159,082; Russia, 800,334; Spain, 784,573. 

It must be pointed out, however, that of the total tonnage for the United 
States, less than 8 per cent was engaged in foreign trade. Before the Civil 
War, in the days of wooden ships propelled by sails, American vessels carried 
two-thirds of our imports and exports that travelled by sea. 



296 PRINCIPLES OF POLITICAL ECONOMY 

receives each year from foreign countries and from her own 
colonies is estimated at $400,000,000. India and the Austra- 
lian colonies, for instance, have negotiated in England almost 
the sum total of their loans. How numerous, moreover, are 
the enterprises throughout the world that are in the hands 
of English financiers or promoters ! Englishmen are said to 
have acquired land in the United States having a total area 
equal to that of Ireland. France, too, has numerous claims 
on foreign nations, chiefly in Europe ; they are estimated at 
more than $4,000,000,000, and rep resent an annual revenue 
of 1230,000,000. Probably $3,000,000,000 of foreign capital 
is invested in the United States, and this amount is increased 
in prosperous years. Thus the United States owes about 
$120,000,000 annually for interest on foreign capital. 

In this respect, Spain, Turkey, Egypt, India, and the 
South American republics appear as debtors. But it should 
be observed that whenever these countries issue a loan, and 
so long as this loan is not fully subscribed, they become for 
the time creditors of the countries which take up the loan 
and which therefore send them funds. 

(3) The expenses incurred by foreigners living in the 
country. As the money spent by these foreign visitors or 
residents generally is not the product of their labor within 
the country but is drawn from their estates or from capital 
invested at home, all countries which are resorted to by 
wealthy foreigners are constantly receiving large sums of 
money from abroad. When brought into the country in 
the pockets of visitors or sent them through the mails, this 
money does not figure in the statistics of imports. From 
this point of view France, Italy, and Switzerland are credit- 
ors of England, the United States, and Russia for consid- 
erable amounts. The latest French census, for example, 
indicates that there are in France 66,000 foreigners, living 
mostly on independent incomes ; the number of those that 
stay but a short time is certainly much larger than this. 
Now suppose that each of these foreign residents spends 



THE BALANCE OF ACCOUNTS 297 

12000 a year (certainly a low estimate for people who are 
there for amusement); this would mean an annual tribute 
of §132,000,000 paid by those who are staying for longer 
periods. This sum comes from the respective home countries 
of these foreigners and pays, so to speak, the bill for their 
boarding expenses in France. 

It is estimated that Americans spend about $50,000,000 in 
foreign travel each year, and that tourists spend $40,000,000 
annually in Switzerland. 

These are the principal items to be considered in this con- 
nection. 1 They are more than sufficient to restore the equilib- 
rium of international trade and solve the enigma referred to 
above. If, for example, in the case of France, we find her 
debit account to consist of $900,000,000 for goods imported, 
$72,000,000 for the transportation of goods carried under 
foreign flags, and $100,000,000 (let us say) for French 
citizens travelling abroad, or for French property held by 
foreigners, the sum total of debits would be about $1,070,- 
000,000. If, on the other hand, we credit her with exports 
to the value of $800,000,000, plus $220,000,000 as interest on 
French capital invested abroad, and $132,000,000 spent by 

1 There are other kinds of credits and debits besides those indicated ; for 
example : — 

(a) Bankers' commissions, whenever bankers extend their business to 
foreign countries. Stock-exchange cities like London, Paris, and Berlin 
receive orders and transact business for all countries. As this is not done 
gratuitously, these countries become to some extent creditors of other 
countries. 

(&) The sale of ships. Purchased ships do not figure on the custom-house 
books either as imports or exports. England builds ships for many other 
countries and on this score too is a creditor for large amounts. In some years 
more than 1,000,000 tons of ships, mostly steam vessels, are launched from 
the great shipyards at Belfast and on the rivers Clyde, Wear, Tees, and Tyne. 

We must be careful, however, not to reckon the profits of exporters under 
this head, though many treatises on political economy do this. These prof- 
its are already included in the value of exports, and to count them again 
would be a mistake. The value of exports is determined by the customs 
officials according to the current prices of commodities, and this price of 
course covers the profits of manufacturers and dealers. 



298 PRINCIPLES OF POLITICAL ECONOMY 

foreigners living in France, the sum total of credits is about 
$1,150,000,000. Thus France has a good balance in her 
favor. A similar calculation would show a similar state of 
affairs in England, and, in fact, for most of the older 
European creditor nations which appear to have an " unfavor- 
able balance of trade." 

We must therefore conclude that the foreign trade of a 
country is in equilibrium not when exports and imports are 
equal in value (which never happens), but when its credits 
and its debits are equal. 

II. How the Balance of Accounts is Maintained 

We must abandon the old and absurd idea, often 
expressed by well-known newspapers, that a country which 
imports more than it exports is rapidly approaching ruin. 
The problem, however, is merely somewhat altered by substi- 
tuting the more important " balance of accounts " for the 
" balance of trade." With this change the problem reads : 
Is there risk of ruin when a country is obliged, — all things 
considered, — to pay foreign nations more than it receives 
from them? 

We must certainly reply affirmatively to this question. 
If a nation having no claims on foreign nations to restore the 
balance buys more than it sells, or if its well-to-do inhabit- 
ants leave the country in order to spend their incomes 
abroad (which is called absenteeism), then that nation will be 
compelled to export its metallic money. To remedy the 
growing scarcity of metallic money it will probably resort 
to the issue of paper money. But as this paper money, 
although it will take the place of coin in interior com- 
merce, cannot be employed to pay foreign nations, the 
country will be obliged to borrow abroad the sums that it 
must pay. Such a course as this must inevitably lead 
nations, as it does lead individuals, to bankruptcy. Indeed, 
it would not be difficult to find in South America, and even 



COUNTERACTING TENDENCIES 299 

in Europe, many examples of this. Yet we must recognize 
certain counteracting forces which operate very effectively 
and which tend to obviate this evil. 

Persons who have payments to make abroad endeavor to 
settle them by some other means than the exportation of 
money, because sending money is inconvenient, and because 
the money sent is not generally legal tender in the country 
where the debt must be paid. Therefore debtors try to buy 
bills of exchange payable in these foreign countries, in order 
to obviate the danger, inconvenience, and expense of trans- 
porting gold and silver. Bills of exchange, as we have seen, 
form the ordinary means of paying international debts. But 
if a country owes more abroad than foreign nations owe her, 
it is clear that foreign bills of exchange, i.e. claims on foreign 
debtors, will be relatively scarce. These bills will therefore 
be in great demand, and by virtue of the law of demand and 
supply they will sell at a higher price than their normal 
value. In other words, they will be at a premium. Now it 
is plain that this premium, bringing profit to all those dealers 
who have claims on foreign nations and who therefore have 
bills of exchange to sell (and this class consists evidently of 
all exporters), will stimulate the exportation of goods to 
foreign countries; inversely, the necessity to pay this pre- 
mium, and the consequently disadvantageous situation of all 
those who must make payments abroad (that is to say, all 
importers), will discourage imports. 1 The result will be an 
increase of exports and a decrease of imports, — precisely the 
remedy best suited to the situation. 

Nor is this all. Let us admit that the inequality of debits 
and credits involves a continual drain of money from a coun- 
try. The flight and consequent scarcity of money causes a 
fall in prices ; and although a fall in prices has some disad- 
vantages, yet in this particular case it has the advantage of 
stimulating purchases by foreigners, since trade always seeks 

1 For the understanding of this and the succeeding pages it would be well 
to read the section on the Rate of Exchange. 



300 PRINCIPLES OF POLITICAL ECONOMY 

the markets in which one can buy cheapest. At the same time 
the amount of purchases made abroad by the debtor nation 
will of course decrease, because commodities can now be 
bought quite as cheaply at home. It is a well-known fact 
that goods are not taken away from dear markets to cheap 
markets, any more than water runs up hill. In short, the 
situation just described tends to encourage exportation and 
discourage importation — r securing the same beneficent result 
as that discussed in the preceding paragraph. 

If paper money has been issued to take the place of metal- 
lic money, the result is the same. Metallic money will then 
be at a premium ; the greater the amount of paper money, 
the higher the premium. The producers of a country find 
it profitable to sell abroad, because then they are paid in 
metallic money, which brings a premium, and thus involves 
additional profit. Hence this condition of affairs encourages 
increased exportation. Importation, on the other hand, is 
slackened, because foreign producers do not like to sell in 
a country having a depreciated paper money; or if they 
do sell, they raise their prices, and this, again, restricts 
sales. 

To sum up, then : There is a sort of automatism in the 
balance of accounts that tends to restore the equilibrium 
whenever it is disturbed — in much the same manner that 
regulators on steam engines tend always to maintain a uni- 
form speed. The current of trade cannot forever continue 
in one direction any more than the tide of the sea ; sooner 
or later it must change, and after metallic money has been 
taken out of a country there are natural forces which tend 
to bring it back again. 

Statistics, as well as simple observation, show that money 
plays only a small part — usually less than 10 per cent of 
the total amount — in international trade. (See page 284.) 
We must therefore admit that the balance of accounts 
regulates itself, and that credits and debits tend of their 
own accord to reach an equilibrium. This, in fact, is 



ADVANTAGES OF FOREIGN TRADE 301 

what the school of Bastiat would call an " economic 
harmony." 1 

Experience, moreover, demonstrates that whenever the 
ratification of a commercial treaty or any other circum- 
stance gives rise to a great increase of imports, this is 
invariably accompanied by a corresponding increase of 
exports. Whenever, on the other hand, a protective tariff 
causes a decrease in the volume of a nation's imports, it 
is a natural consequence that its exports will likewise 
diminish. 

III. The Advantages of International Trade 

We have seen that exchange among individuals is an 
indispensable complement of the division of labor, and that 
both together result in a prodigious increase of productivity. 
On a larger scale, the same thing is true of nations as well as 
individuals. Therefore, prima facie, international exchange 
offers economic benefits similar to those resulting from per- 
sonal and domestic exchange. In private and domestic 
trade, men exchange goods and services because of a relative 
superiority at different points. In international trade, this 
relative superiority may be due either to better natural 
facilities and resources or to the peculiar aptitudes of the 
population of a nation. But by means of foreign trade the 
advantages of this superiority are enjoyed to some extent by 
all nations that exchange with one another. 

It is strange that the advantages of international trade 
have been considered from two precisely opposite points of 

1 The same idea as that explained above may be expressed more strikingly 
by saying that international trade, except for the superiority of methods 
employed, always tends to take the form of barter. Indeed, we have shown 
that every debt to a foreign country gives rise to the exportation of goods to 
that country, and, vice versa, every claim against a foreign country leads to 
the importation of goods from that country. Of course, merchandise is not 
always exchanged for merchandise, inasmuch as services are often given 
in exchange for merchandise. Switzerland, in exchange for the money of 
tourists, gives the privilege of seeing her mountains and water-falls. 



302 PRINCIPLES OF POLITICAL ECONOMY 

view. The classical economists consider only imports. They 
regard importation as the object and the raison d'etre of 
international trade. Exportation is but a means — the 
only means — by which a nation can procure the goods it 
imports. Exports, in other words, are the price paid for 
imports. The value of imports above and beyond that of 
exports exactly measures the advantage resulting from 
international trade. To acquire, for instance, an amount 
of imported merchandise worth $800,000,000 by exporting 
goods worth only $600,000,000, is an operation that brings 
$200,000,000 profit to a country. The less we give in 
exchange for what we want, — so reason the classical 
economists, — the more profitable is the transaction. 

According to the protectionists, and according to current 
public opinion, the advantages of international trade must 
be considered from the view-point of exports. Exports, it 
is held, constitute the real profit of international trade. 
Imports are thus regarded only as a necessary evil to which 
a nation must submit whenever it cannot produce all that 
it needs ; but a nation should strive to reduce its imports to 
the lowest possible amount. Exportation means increased 
wealth, — the receipt of money in payment for goods sold 
abroad. Importation, on the other hand, means expense, — 
the payment of money to foreign nations. Hence the ad- 
vantage of international commerce is measured by the sur- 
plus of exports over imports, — of receipts over expenditures. 
As the United States in 1902 exported $480,000,000 worth 
more of goods than was imported, this sum indicates the 
nation's gain in international trade for that year. 

Both of these opposite points of view are false. Both are 
based on the mistaken assumption that a nation may be 
regarded in the same light as an individual. A great coun- 
try cannot be likened (as the classical economists are fond 
of doing) to a person carrying on trade solely as a means 
of procuring what he needs. A nation does not export 
goods merely in order to be able to import them, but be- 



ADVANTAGES OF IMPORTATION 303 

cause exportation furnishes advantages that are peculiar to 
itself; exportation is an end, an object of itself, not 
simply the means to an end. It is true that by virtue of 
the principle stated in the previous section, exportation in- 
directly gives rise to a corresponding importation, but this 
result is due to economic forces quite independent of the will 
of exporters and importers. 

Inversely, the second point of view, which likens a great 
nation to a store-keeper who buys only in order to sell again, 
and whose profit consists in the excess of the selling-price 
over the purchase-price, is no less erroneous. What a 
singular idea it is to measure the benefits of exchange and 
commerce among nations just as one would measure the 
profits of merchants ! This conception overlooks the fact 
that the profits which merchants draw from their transac- 
tions are a burden for both producers and consumers. Mer- 
chants certainly are entitled to receive some tribute for the 
social service which they render, but this tribute must, never- 
theless, be deducted from the advantages of exchange. If 
merchants or traders made no profits at all, exchange would 
be none the less beneficial ; nay, it would be even more 
beneficial. As Cairnes admirably has said, to measure the 
advantages of trade by the profits of traders would be just as 
reasonable as to measure the advantages of education by the 
salaries paid to teachers. 

In fact, the advantages of international trade are not 
susceptible of arithmetical calculation ; they cannot be 
measured in money. They are too complex for such simple 
methods, and are found on both sides, — that of imports 
as well as that of exports. 

The following are the advantages of importation : — 

(1) Additional well-being, whenever we have to do with 

imported goods which a country, because of its soil or its 

climate, could not have produced within its own borders. 

There are innumerable examples of this. Without inter- 



304 PRINCIPLES OF POLITICAL ECONOMY 

national commerce, Holland would have no building stone, 
Switzerland would have no coal, most European countries 
would have no tropical fruit, England would have little 
lumber and no wine, Norway would have no salt, France 
would have no copper, and the United States would have 
no tea or coffee, — the list would be long if we attempted to 
make it at all complete. 1 

(2) Economy of labor. This is true whenever wealth is 
imported that could be produced at home only at a higher 
cost than abroad. France, for example, could make her own 
machinery, and do it very well ; yet it is generally more 
profitable for her to import it from England or the United 
States, because these countries are not only better provided 
by nature with iron and coal, but also possess better facili- 
ties for manufacturing goods of this sort. 2 

This advantage of international trade ordinarily presup- 
poses the productive inferiority of the importing nation, as 
regards the product imported. Yet this is not an indispen- 
sable condition or one without which such importation would 
be disadvantageous. It may be to a nation's gain to obtain 
certain goods by importation even though it be capable of 
producing them within its own borders under more favorable 
conditions than the country which sends them. Suppose, for 

1 Many European countries have too small a territory to provide food for 
their population. In order to feed her rapidly increasing population England 
is now obliged to import more than $1,000,000,000 worth of food stuffs, i.e. 
more than half of what she consumes in cereals, meats, drinks, etc. This is, 
moreover, a fact that is increasing in importance in all populous countries 
devoted largely to manufacturing. With the growth of population, European 
countries will be obliged to send abroad for an increasingly large part of 
their food-supply. 

2 This advantage is the only one recognized by the classical school as 
resulting from international trade. Bastiat formulated it in this manner : 
"obtaining an equal satisfaction with less effort." John Stuart Mill, in a 
formula slightly different but in substance the same, put it in this way : 
"obtaining a more useful employment of the world's productive forces." 
Such is indeed the advantage of exchange between individuals, as we have 
already explained (page 199) ; it is like an extension of the division of labor. 
But this point of view is insufficient, and even incorrect, for international 



FOREIGN TRADE ECONOMIZES LABOR 305 

instance, that Cuba could produce wheat under more favora- 
ble conditions, i.e. with less labor, than the United States : 
If, for example, a bushel of wheat costs one day's labor in 
Cuba and two days' labor in this country, would it be better 
for Cuba to produce her own wheat rather than to import 
it from this country? Not necessarily. Perhaps Cuba can 
procure sugar even more advantageously than wheat, requir- 
ing only half a day's labor to produce an amount of sugar 
that can be exchanged for a bushel of wheat from the United 
States. In this event it will be more profitable for Cuba to 
raise sugar and to import wheat, inasmuch as she can thus 
purchase with half a day's labor what otherwise would have 
cost her a whole day's labor. 

It may thus happen that a country in all points superior to 
its neighbors will nevertheless find it profitable to import 
goods from them. For even in this case a country will gain 
by devoting itself to the production of those goods in which 
its superiority is greatest, and selling them for goods in the 
production of which its superiority, although real, is not so 
great. 1 In this case exportation would be only a means to 
an end. 

exchange. Each nation, as we shall see, far from tending to a more detailed 
division of the world's labor, seeks, and should seek, to develop its economic 
autonomy. 

Again, the cost of production cannot serve as a standard in international 
exchange, any more than it can so serve, ordinarily, in exchange between in- 
dividuals. Although competition is supposed to keep value at the level of 
the cost of production, it does so only on the assumption that labor and capital 
can immediately be transferred to wherever they are most in demand. Now 
this supposition, which is very imperfectly realized within the borders of a 
single nation, becomes absurd when applied to international commerce. It 
therefore still remains to be discovered how values are determined in inter- 
national trade. This difficult problem is discussed at some length by Ricardo, 
John Stuart Mill, Cairnes (" Some leading Principles of Political Economy ") 
and Cournot (" Principes mathematiques de la the"orie des richesses," 
Chapter 12). 

1 The same thing is true of individuals. A physician may also be a very 
expert gardener ; yet it may be best for him to entrust his garden to a 
gardener less expert than himself in order to devote all his time to his patients. 



306 PRINCIPLES OF POLITICAL ECONOMY 

Another advantage of international commerce closely allied 
with those indicated above, consists in the circumstance that 
whenever an accident of any sort unexpectedly reduces the 
productivity of one country, it may depend on others to remedy 
this accident, which, in the absence of international commerce, 
might have the most disastrous consequences. Thus interna- 
tional commerce provides a kind of assurance against famines, 
against the effects of the failure of crops, and against a mul- 
titude of economic misfortunes the effects of which are either 
attenuated or entirely prevented by trade between nations. 
This advantage of international trade cannot be measured in 
dollars and cents, and is sometimes entirely overlooked. 

Under the head of economy in labor, it should be noted 
that although a nation could perhaps produce a sufficient 
quantity of many commodities which it at present imports, 
the quantity produced at home could be increased only at 
a very great cost of labor and capital and a consequent in- 
crease in prices. The United States, for example, imports a 
large quantity of lead. It is probable that if it were neces- 
sary we could produce almost enough lead for the home 
market. If imports were cut off and we were required to do 
this, it would mean the exploitation of mines which now do 
not give sufficient returns to pay for the labor and capital 
necessary to work them. Cut off our foreign trade in lead, 
and it would be necessary to work these poorer mines, despite 
the greater cost ; and as this increased cost of mining 
must be borne by the consumers of lead, the price would 
immediately rise to a level sufficient to make lead-mining 
remunerative in the case of the poorest mine that is worked, 
but whose output is necessary to satisfy the demand. The 
cessation of foreign trade would in this manner involve a 
great increase in the price of many commodities which are 
now in part imported from other nations. 

As for exportation, the following are its advantages: — 

(1) It utilizes natural resources and productive forces 
which, if there were no outlet for them in foreign countries, 



ADVANTAGES OF EXPORTATION 307 

would be superabundant and therefore partially useless. 
Were it not for exportation, Peru would not know what to 
do with her guano and her nitrates, nor Australia with her 
wool, nor Spain with her wines, nor California with her gold, 
nor Pennsylvania with her iron and steel, nor Minnesota 
with her flour, nor the southern states with their cotton. 

(2) It develops a nation's industry. We have already 
explained (page 176) that the extent of the division of labor 
and the progress of large-scale production are proportionate 
to the size of the market. The division of labor cannot be 
at all detailed when the market is small, whereas with every 
extension of the market a more elaborate division of labor 
and the introduction of more expensive but in the long run 
more productive processes and machinery becomes possible. 
International trade, by creating world-wide markets for 
goods, tends to develop the division of labor ; it leads to a 
fuller utilization of the possibilities of the soil and the popu- 
lation, to the completer development of acquired aptitudes, 
and hence to a great increase of the productive energy of 
humanity. England could never have become the great 
manufacturing nation that she now is, did she not export 
goods to all parts of the world. The possession of an ex- 
tensive market made it possible for her to make immediate 
and profitable use of the latest inventions and improvements 
in manufacturing. 1 

IV. Why International Trade necessarily is Detrimental to 

Some Persons 

It must not be inferred from the above discussion that 
international trade is always beneficial to everybody. That 
would be to misunderstand its effects. In fact, it follows 

1 Professor Leroy-Beaulieu maintains that international trade, especially- 
international free trade, intensifies competition, makes coalitions and trusts 
among producers difficult, propagates the best industrial and agricultural 
methods, and stimulates all branches of human activity. ("Economie poli- 
tique," Vol. IV, pages 80, etc.) 



308 PRINCIPLES OF POLITICAL ECONOMY 

from our explanation that one effect of international trade is 
to economize a certain amount of labor. Now as our modern 
societies are based on the division of labor, it is evident that 
labor cannot be economized without throwing a certain class 
of laborers out of employment. 

If the United States should increase its imports of cotton 
manufactures from Great Britain by $20,000,000 annually, 
this would be advantageous to American consumers and 
to the country in general if it made cotton goods obtainable 
at a smaller cost and for less labor than would otherwise 
be the case. But an increase in the importation of these 
goods means loss of employment for American workmen 
engaged in this branch of production. It is true enough (as 
we explained in a previous section of this book) that an 
increase of imports gives rise to a counter-current of exports, 
and that these English cotton manufactures would doubt- 
less be paid for with American cereals or American cattle, 
which would have to be raised for that purpose. But we 
must not forget that cotton goods imported from England 
represent a lower value than the American cottons which 
they supplant in the market ; else they would not success- 
fully compete with American goods. Perhaps our home 
manufacturers could not produce these $20,000,000 worth 
of cotton goods for less than $30,000,000. To balance this 
amount of English imports, however, there will be a counter- 
current of American exports amounting to only $20,000,000. 
In other words, the final result would be a diminution 
of home production to the extent of $10,000,000 and a 
corresponding reduction in the amount of American labor 
required. 

If there were no other effect but this displacement of 
labor, which is perfectly obvious, this in itself would be a 
grave injury to some classes of our population. The owners 
of our cotton mills, moreover, unable to change their build- 
ings into wheat farms or pasture lands, evidently would 
lose the capital that is invested in these factories. As the 



EFFECTS OF FOREIGN TRADE 309 

laborers in their employ are not in a position to take up 
farming or cattle-raising for English consumers, it is by no 
means certain that they will find other employment. Thus, 
the consequence is likely to be ruin for the employers and 
idleness and poverty for the employees. 

There are, however, a few attenuating circumstances not 
to be overlooked. It may be said that international trade, 
like machinery, may ultimately cause an increase in the 
amount of work, which it began by diminishing. It may 
do this in two ways : — 

(1) The fall in prices resulting from free trade will cause 
an increase in consumption and, consequently, an increase in 
production. A decline in the price of cotton goods will lead 
to increased purchases either of cotton goods or of other 
commodities. What the people save in the decreased price 
of cotton goods they will perhaps use to purchase goods of 
home production. And even if the savings are used to buy 
foreign goods, and not American products, it will neverthe- 
less be necessary to pay for this larger bulk of imports by 
exporting larger quantities of American goods. In the 
case discussed above, the exports of American wheat and 
cattle may be increased not merely by $20,000,000, but by 
$30,000,000. 

(2) The fall in prices diminishes the expenditures of those 
that consume the commodity in question. The consumers 
are therefore enabled to devote the amounts saved to produc- 
tive enterprises, old or new. Increased productive capital 
means the employment of additional labor. In this case, 
too, the work that has been taken from the laborers is 
restored to them by the growth of other branches of pro- 
duction ; and thus it is probable that the national labor will 
not be reduced at all. 

Not only importation, but also exportation, may have 
undesirable effects. Countries, for example, which regu- 
larly export cereals (like the United States and Russia) 
may ultimately impoverish their soil and rob it of all the 



810 PRINCIPLES OF POLITICAL ECONOMY 

fertile properties that it possesses. These properties are 
removed in part with each crop that is taken from the 
land. 1 It may almost be said that such countries are gradu- 
ally exporting their soil itself. Peru, which has already 
exported all of her guano, is now rapidly exhausting her sup- 
ply of nitrates, consuming in the most improvident fashion 
the stores of wealth that nature has given her. 

V. The History of Protectionism 

During antiquity and the Middle Ages international trade 
was not so widespread as it is to-day. It was in the 
control of a few small countries, — Tyre and Carthage in 
antiquity, the Italian and Hanseatic cities in the Middle 
Ages, and Holland at the beginning of the modern epoch. 
These, by reason of their maritime situation, acquired a mo- 
nopoly of commerce and transportation. The other peoples 
merely played a passive part ; they received foreign traders 
in very much the same way that tribes of African negroes 
now receive European or Arabian merchants, i.e. with some 
degree of friendliness because they are thus enabled to pro- 
cure commodities which would otherwise be unobtainable. 
Sometimes non-commercial peoples even sought to attract 
foreign merchants by granting them certain privileges. 
They always, however, required foreign merchants to pay 
special taxes or fees in exchange for the protection or privi- 
leges afforded ; these taxes were a kind of obligatory profit- 
sharing. Precisely the same thing is done nowadays by 
African chieftains who tax the caravans which pass through 

1 Henry C. Carey has emphasized these considerations and made them 
part of his argument for protection. All the articles derived from the land 
are really separated parts of it, which must be restored on pain of its exhaus- 
tion. Hence, declares Carey, the producer and the consumer must be close 
to each other ; the products must not be exported to a foreign country in 
exchange for its manufactures, and thus go to enrich, as manure, a for- 
eign soil. In immediate exchange value the landowner may gain by such 
exportation, but the productive powers of the land will suffer, 



THE RISE OF MERCANTILISM 311 

their dominions. Thus customs duties — if we may apply 
this name to these early forms of compulsory tribute — were 
originally mere fiscal taxes and in no wise protective. What, 
indeed, could they have protected? 

With the development of great nations during the six- 
teenth and seventeenth centuries, however, the problem of 
customs duties acquired a different character for the follow- 
ing three reasons : — 

(1) Because the great nations of Europe endeavored to 
form national markets, closed to the outside world, produc- 
ing whatever they required and sufficing unto themselves. 

(2) Because the great importance attributed to the 
precious metals, gold and silver, after the discovery of 
America, led to the idea that a nation should buy as little 
as possible abroad in order not to be obliged to export 
metallic money. 

(3) Because the opening of the world's great maritime 
routes led to an unprecedented development of international 
commerce. Competition between nations, which could not 
exist when commerce was limited chiefly to the transporta- 
tion of articles of luxury (such as Tyrian purple, Venetian 
brocades, Toledo blades, etc.) became a factor of importance 
when commerce was sufficiently developed to transport 
articles of more general use (such as Flemish cloths). 

We have already referred, in our sketch of the history of 
economic doctrines, to mercantilism (page 7), which arose 
during the sixteenth century. The mercantilists exagger- 
ated the importance of money and of foreign trade as a 
means of procuring money. This undue emphasis, however, 
was not so absurd as some authors have maintained, for at 
a time when commerce had barely begun, when the great 
nations of Europe were being formed into powerful states, 
when taxation in money had just taken the place of taxation 
in products or in labor, a great increase in the amount of 
money in a country was indispensable. Soon afterward, 
another matter began to receive the attention of statesmen, 



312 PRINCIPLES OF POLITICAL ECONOMY 

namely, the desire to place the nation in a position of eco- 
nomic self-sufficiency. This ambition may properly be 
regarded as the original germ of the protectionist idea. It 
must be observed, moreover, that in pursuing this aim men 
were simply carrying out the natural order of economic 
evolution, which has constantly been widening the economic 
group : first it was the family that formed an autonomous 
economic unit, then the village or town community, then the 
national market. To-morrow, perhaps, the economic unit 
will consist of the whole Western world. (See the section 
on the History of Exchange, page 184.) 

It was therefore natural that statesmen should conceive the 
idea of employing customs duties as a means of excluding 
foreign competition and developing the economic possibili- 
ties of a nation. Customs duties lost their fiscal character 
and became protective. 1 In England, Cromwell, and in 
France, Colbert, were the first statesmen to devise a genuine 
protective system. Colbert himself formulated the principal 
objects of the protective system under three heads : — 

(1) To prevent the importation of manufactured goods 
by means of protective duties. 

(2) On the other hand, to favor the importation of raw 

1 Customs duties may of course still have a fiscal character, making them 
what in this country is known as "tariff for revenue." Thus England, 
although asserting that she has absolute free trade, puts a duty on certain 
products (tea, coffee, sugar, tobacco, and wine), and in this way collects a 
revenue amounting to about $100,000,000. Yet these duties have a purely 
fiscal character, because England does not wish to produce, or could not pro- 
duce, any of these commodities on her own soil. 

Whenever a government is about to introduce customs duties, it is very 
important to know just what character these duties shall have. This is no 
mere question of names. For when duties are to be primarily fiscal, the 
government should lower them to a level that will encourage the importation 
of the products taxed ; experience has shown that when taxes of any kind 
have for their object the production of a maximum of revenue (postal 
charges, for example), the proceeds of the tax generally are highest when 
the tax is most moderate. If, on the other hand, it is intended that duties 
shall have a protective character, the government should raise them high 
enough to restrict the importation of the commodities that are taxed. 



OBJECTS OF COLBERTISM 313 

materials, and all commodities used in manufacturing, by 
reducing duties and all other charges which might restrict 
such importation. 

(3) Above all, to encourage the exportation of national 
products by reducing taxes, or, if need be, by granting sub- 
sidies and bonuses. 

This system, which is sometimes designated as Colbertism, 
reigned supreme until the " economists " made their appear- 
ance. We know that the latter (see page 23) took as their 
motto the rule, "laisser faire, laisser passer," and that they 
fought quite as energetically for free trade (as opposed to 
protectionism) as they did for freedom of labor (as dis- 
tinguished from the guild system). But the French Revo- 
lution, which led to the triumph of their doctrine with regard 
to the freedom of labor, did not by any means inaugurate 
free trade. Twenty years of European war were ill suited 
to the propagation of the idea that there should be free and 
unrestricted commerce among nations. 

In England, however, the ideas of Adam Smith spread rap- 
idly. In 1838, at Manchester, Cobden began the remarkable 
campaign that was destined to overthrow the system of pro- 
tection. He very adroitly chose the field of combat by direct- 
ing his attacks solely against the protective duty on " corn." 1 
It was indeed a particularly odious spectacle to behold the 
rich lords of England, owners by right of conquest of nearly 
all the land of the kingdom, keep out foreign wheat in order 
to sell their own more dearly, or to collect higher rents, and 
thus profit by the growing need of the population for food. 
The House of Lords found that it could with poor grace 
resist the popular indignation fostered by the "Anti-corn- 
law League " in 1846 ; and when Sir Robert Peel, the prime 
minister, was converted to the popular cause, the lords were 
obliged to yield. Once the duty on wheat was abolished, 
all the rest of the English protectionist system (including 

1 In England the word "corn" means either wheat, barley, rye, and oats 
collectively, or, more specifically, wheat. 



314 PRINCIPLES OF POLITICAL ECONOMY 

the famous Navigation Acts of Cromwell, to which the mari- 
time greatness of England has been attributed) fell to pieces. 

In France, a league founded by Bastiat in 1846, and mod- 
elled on the English Anti-corn-law League, failed because 
the social conditions were entirely different from those 
which prevailed in England. But Emperor Napoleon III, 
whose policy was founded on an alliance with England, and 
whose tendencies were rather democratic, took advantage of 
the power conferred on him by the French Constitution, and 
without consulting the Chamber of Deputies, signed a com- 
mercial treaty with England. This celebrated treaty of 
1860, for which the French people were very unenthusiastic, 
gave rise to considerable comment in Europe and was imme- 
diately followed by the signing of analogous treaties by most 
European powers. There seemed to be every indication 
that the era of free trade had fairly begun and that it would 
long continue. 

Yet its rule was of brief duration. The United States, 
as we shall see presently, after the Civil War, resolutely 
adopted a strong protectionist policy, and has since then 
persevered along the same line. In 1872, after the Franco- 
Prussian War, France, under the government of Thiers, 
tried to follow the example of the United States by levying 
upon foreign imports the taxes designed to pay for the un- 
successful war that had just been terminated. This effort 
failed because of the treaties still in force. In 1879 Ger- 
many, on the initiative of Bismarck, inaugurated the return 
of European nations to a decidedly protectionist policy, 1 
and her example led almost immediately to the adoption of 
a similar policy by most nations of Europe, just as the ex- 
ample of France in 1860 had led to the general adoption 
of the free trade system. There are now few nations in 
Europe, — except England, Holland, Norway, and Denmark, 
— that have remained faithful to free trade ; everywhere 

iln point of date, Austria was the first, by adopting the tariff of June 27, 
1878 ; but her example had much less influence than that of Germany 



EARLY AMERICAN TARIFFS 315 

else, even in Switzerland, tariff barriers have been raised 
and tariff wars have taken the place of commercial treaties. 1 

From the very start the foreign commercial policy of the 
United States has been more or less protectionist. Hamil- 
ton's celebrated Report on Manufactures was a clear state- 
ment of the protectionist theory, and not the least remarkable 
of its author's state papers. Our constitution forbade the 
imposition of export duties, but lodged in the hands of 
Congress exclusive power to levy import duties. The first 
tariff measure brought before Congress was introduced by 
James Madison and passed on July 4, 1789. It provided for 
the "encouragement and protection of manufactures." The 
protection afforded by this measure, however, could not have 
been very great, inasmuch as the general level of duties was 
but 5 per cent ad valorem, and the highest rates on luxuries 
did not rise above 15 per cent. These rates were soon 
found insufficient to provide the necessary revenue, and were 
subsequently increased. Between 1789 and 1812, thirteen 
tariff laws were enacted by Congress ; the general purpose 
of these laws was to increase the duties and the number of 
dutiable articles, — primarily in order to meet the expenses 
of the government, but also in order to protect American 
industries. 

The reports made by the committees of Congress and the 

1 Even in England the government has decided to reestablish customs 
duties on cereals in order to pay the expenses of the South African War. 

Customs duties are established by law. They are either ad valorem, i.e. 
proportionate to the value of goods, or specific, i.e. determined by the weight 
or volume of goods. The first are more equitable, the second more simple. 
But it is no easy matter to apply the law justly in either case. In the first 
place, ad valorem duties give rise to false declarations of the value of goods. 
In order to prevent this the customs officials sometimes possess the right of 
preemption, by which they can purchase imported goods at their estimated 
value ; this rule, however, has little effect. When, on the other hand, 
duties are specific, i. e. determined by the number, weight, or volume of cer- 
tain kinds and classes of goods, it is necessary to prepare complicated and 
lengthy classifications of goods ; and even then there are apt to be instances 
of flagrant injustice. The present system in this country is a combination of 
both kinds of duties. 



316 PRINCIPLES OF POLITICAL ECONOMY 

subsequent debates thereon indicate very clearly that the 
protection of American industries against foreign competi- 
tion was a principle very widely accepted. The restriction 
of our foreign commerce, due to the embargo policy of 1807 
and the war of 1812, was equivalent to a rude but vigor- 
ous application of protection. During this period, Northern 
capitalists had been obliged to find new means of employ- 
ment for their idle funds, which could no longer be profitably 
invested in the shipping interest. They turned their atten- 
tion to manufacturing enterprises, and established the textile 
industries of the North. 1 But when peace was concluded, 
British manufacturers sent immense quantities of goods to 
American ports, and the Northern manufacturers saw the 
market for their cottons, woollens, and iron rapidly slipping 
from them. They therefore appealed to Congress for aid in 
the shape of a protective tariff which would preserve the 
home market to them. One result of this appeal was the 
tariff act of 1816, which imposed a duty of about 20 per 
cent on all cotton and woollen goods imported from abroad, 
and specific duties on salt and iron. Thus the tariff became 
distinctly protective. 

By 1824, eight years after the tariff act of 1816, of 
which Calhoun had been one of the chief supporters, the 
Southerners became the declared enemies of protective tariffs. 
The tariff, in their opinion, was of no benefit to them, whereas 
it favored the agriculturists of the West and the manufac- 
turers of the North. The national policy, however, continued 
to be protectionist, although from 1833 to 1842 and from 
1846 to 1861 duties were reduced toward a revenue basis. In 
1861 the Morrill tariff restored duties to about the level 
of 1845, but increased the duties on iron and wool. 

1 In 1803 there were four cotton factories in the country. Five years later 
there were fifteen mills, with eight thousand spindles. By 1811 the number 
of spindles had increased tenfold, — to eighty thousand, — and in 1815 there 
were five hundred thousand spindles in operation. The home consumption of 
cotton illustrates the same development. In 1800 American manufacturers con- 
sumed five hundred bales of cotton ; in 1815 they used ninety thousand bales. 



THE " WAR TARIFFS " 317 

When the Civil War broke out, the government was 
obliged to seize upon every possible source of revenue, and 
duties on imports were naturally made to furnish their share 
of the burden. It was necessary, moreover, to tax foreign 
goods heavily in order not to place at a disadvantage those 
domestic producers whose goods were now heavily taxed. 
Accordingly, the " war tariffs " of 1862 and 1864 imposed 
duties on all imports, and effected a general increase of the 
rates. When peace was established, these war tariffs were 
permitted to remain practically unchanged for nearly twenty 
years, although the internal taxes had been removed. In 
1883 some duties were lowered, but others were raised, and 
the general character of the tariff was not altered. In 1890 
the McKinley tariff removed the revenue duties on raw sugar 
and some other articles, but increased the protective duties on 
articles that competed with domestic products. Again in 
1894 a reverse movement took place, when the Wilson tariff 
reduced the duties on most protected commodities, reimposed 
a revenue duty on raw sugar, and placed wool, copper, and 
lumber on the free list. Finally, in 1897, the Dingley tariff 
was enacted. This act increased the duty on most goods, al- 
though it left copper on the free list and reduced the duty 
on steel rails. It imposed, on the average, a tax of about 
50 per cent of the value of goods imported. 1 

The prevailing tendency among Western nations thus ap- 
pears to be decidedly in favor of protection. In economic 
theory, however, there has been no such marked protection- 
ist reaction as in the commercial policy of many nations. 
Indeed, the majority of economists seem to have remained 
faithful to the classical doctrines on this subject. Neverthe- 
less, the German economist Friedrich List, in his " National 
System of Political Economy" (1841), and the American 

1 The tariff history of the United States may be found in Taussig, " Tariff 
History of the United States"; Bolles, " Financial History of the United 
States"; Sumner, "History of Protectionism in the United States"; and 
W. M. Daniels, "The Elements of Public Finance." 



318 PRINCIPLES OF POLITICAL ECONOMY 

economist Henry C. Carey, in his " Principles of Social Sci- 
ence" (1856), had already attacked the so-called Manchester 
doctrine at the very time that this doctrine was in the full tide 
of popularity. The violent reaction that has taken place 
in our own days against the classical school, although not 
directed especially against this point of its system, has con- 
tributed none the less to shake our faith in the absolute 
and rigid principles of classical political economy. To-day, 
economists of the realist or historical school insist that the 
commercial policy of a nation must be suited to its own par- 
ticular conditions. 

VI. The Doctrine of Protection 

No question in political economy has stirred up more 
controversy, caused more volumes to be written, or even 
occasioned more warfare, than that of international com- 
merce. Why should this be so? Is not commerce between 
nations in all points similar to trade between individuals? 
Is it not, like private trade, simply an ordinary and normal 
form of exchange, and, if so, why do we need a special the- 
ory of international trade? If exchange is in itself a good 
thing, how can there be anything dangerous in the purely 
accidental circumstance that the two parties to the transac- 
tion are separated by a national boundary? 

We have already learned that in exchange between indi- 
viduals the division of labor, according to which, for example, 
one man produces only shoes while another produces only 
bread, secures for both participants a greater sum total of 
satisfaction and comfort than would be available if each were 
compelled to provide himself directly with bread and shoes. 
When left entirely to themselves, people exchange goods 
because it is profitable for them to do so. Free traders assert 
that the same is true of international trade, and that free 
exchange between nations permits us to obtain some goods 
at the cost of less labor and capital than when they are pro- 
duced at home. If, for example, the American farmer can 



THE POPULAR IDEA OF FOREIGN EXCHANGE 319 

raise 100 bushels of wheat by 100 days' labor, and our silk 
manufacturers can produce 25 yards of silk in 120 days ; if, 
on the other hand, in France 25 yards of silk require only 90 
days' work, while it takes 115 days to raise 100 bushels of 
wheat: here are conditions which make it eminently desirable 
for French silk producers and American wheat producers to 
exchange their goods. For if international exchange were 
cut off, 100 bushels of wheat and 25 yards of silk would 
cost 220 days' labor in this country and 205 days' labor in 
France ; but by producing silk for both countries, the 
Frenchman can buy more wheat; by producing wheat for 
the French as well as the home market the American can 
buy more silk for a given amount of labor. 1 

This, at all events, is the standpoint of the classical econo- 
mists. They do not admit or conceive that international 
trade can be governed by other than the general principles 
which regulate all trade. The problem of foreign commercial 
policy is no problem at all. Exchange, they declare, is a 
form of the division of labor (the marvellous effects of which 
have already been explained). Its advantages are reciprocal, 
and its utility is absolutely independent of the question 
whether or not those who engage in it are citizens of the 
same or of different countries. 

But public opinion generally does not profess this superb 
indifference. It admits that free trade may be preferable 
theoretically, and might even conduce best to the welfare of 
humanity. Nor do protectionists pretend to be enemies of 
commerce between nations; and they prove this abundantly 
by their efforts to increase such trade and the sacrifices which 
they are willing to make in order to establish international 
routes and railways. But nations, or rather the men that 
govern them, are not accustomed to speculate on the interest 

1 Throughout this discussion of free trade and protection I shall endeavor 
so far as possible to use the very words that are employed by partisans 
of each doctrine — quoting free traders in support of free trade, and protec- 
tionists in defence of protective tariffs, — C. W. A. V. 



320 PRINCIPLES OF POLITICAL ECONOMY 

and welfare of humanity in general. They usually limit 
themselves to caring for the interests of the particular country 
in which they live; and this can hardly be regarded as a 
criminal offence. They contend, — rightly or wrongly, for 
this is the point at issue, — that international commerce, when 
left to, take care of itself, is liable to ruin the industry of a 
nation, to restrict or even to stifle its productive forces, and 
indirectly to endanger its very existence. They hold that 
international trade does not confer equal and reciprocal 
advantages on both participants; that it may lead to the 
enrichment of one nation and the ruin of the other. There- 
fore it behooves a nation to beware that it shall not be ex- 
ploited by its commercial rivals. 

They do not regard international trade as simply a form 
or application of the division of labor and of solidarity, but 
as a kind of warfare, and as one form of the "struggle for 
life " among nations. Just as the art of actual war consists 
in invading the enemy's territory without permitting him to 
invade ours, so the tactics of international trade should 
consist in inundating foreign countries with our own goods 
while not allowing these countries to export their goods to 
our shores. To accomplish this it is necessary to build up 
home industries so that they m;.y become vigorous enough 
to keep out foreign goods and even to compete successfully 
with them in foreign markets. This has been the object of 
protectionism for many years, — an object which it seeks 
to attain b}^ means of elaborate tactics based mainly on the 
following considerations : — 

(1) As international trade possesses all the characteristics 
of a " struggle for life " among nations, it is likely to produce 
all the unfortunate effects that are inherent in economic war- 
fare and competition, — even competition among individuals, 
— namely, the destruction of the weak. For instance : 
France, Switzerland, and Japan, because of cheaper labor and 
perhaps because of better natural facilities, can produce silk 
goods cheaper than the United States ; therefore the unre- 



THE EFFECTS OF FREE TRADE 321 

stricted importation of foreign silks would destroy this branch 
of American industry, which now produces, annually, more 
than #100,000,000 worth of goods and employs 65,000 laborers 
receiving annual wages' of nearly $21,000,000. For a large 
number of other American industries the case is very much 
the same. 

Suppose, now, that the tariff on all these protected prod- 
ucts be removed. Then a large share of the capital and 
labor now employed in them, including the 65,000 laborers 
and the $81,000,000 of capital employed in silk manufactures, 
would become unprofitable. What, in such an event, can the 
silk manufacturers do ? They cannot turn to cotton manu- 
facturing, because England produces cotton goods cheaper 
than we. They are, moreover, excluded from many other 
productive occupations because (under a system of absolute 
free trade) other countries are our superiors in these branches. 
What, then, shall they do ? Will it be necessary for most of 
our manufacturing laborers, representing 22 per cent of 
the total population, to leave our cities and take to farm- 
ing and cattle-raising, in which this country appears to be 
superior to other nations ? We say " appears," because it is 
by no means certain that Russia will not be able to furnish 
the world with cereals cheaper than we, when her methods 
of production and her means of transportation have been 
brought up to date ; nor is it at all certain that the Argentine 
Republic is not our natural superior in raising cattle and 
producing meat for exportation. 

There is, however, one branch of production in which our 
natural advantages seem to be beyond contest, viz., that 
of raising raw cotton. Shall the manufacturers, and, in 
fact, the total population of the country, therefore migrate 
to the Southern cotton fields because cotton is the only, or 
almost the only, pursuit in which we are safe from ruinous 
foreign competition ? Will there be room for all American 
labor and capital in this single branch of production? Is 
it not obvious that under these circumstances the remunera- 



322 PRINCIPLES OF POLITICAL ECONOMY 

tion for capital and labor, — if, indeed, for a great part of 
it there wonld be any remuneration at all, — would be ridicu- 
lously small, especially in view of the facts that the law of 
diminishing returns operates in this branch of production, 
and that the capital and labor now applied to cotton-raising 
already provide three-fourths of the world's demand for raw 
cotton ? 

Should any country prove inferior to others in all branches 
of production, that country would be dislodged from one 
occupation after another, and its only ultimate resource 
would be to transport its population and whatever capital 
it had left, to those countries which had triumphed over 
it in the competitive struggle. 1 Only thus could it profit 
by the conditions which assure the economic superiority of 
rival nations. In other words, if we can no longer bear 
foreign competition our only resource is to emigrate to foreign 
countries, — to Russia, or to South America, or to England ! 
This, protectionists contend, is the logical outcome of a system 
that regards international trade simply as the method of 
economic organization best suited to getting the most out of 
the earth and its inhabitants, without reference to the fact 
that these inhabitants are divided into nations, and that each 
nation has the determination and the right to live and to 
prosper. 

It is comprehensible, — protectionists continue, — that in 
the case of human beings an out-and-out Darwinist might 
willingly sacrifice individuals to the interest of the race or the 
species. But we cannot expect a nation to permit its own 
destruction for the sake of mankind as a whole. To expect 

1 This is what takes place in the case of commerce among various parts of 
the same country. Many counties in the United States have decreased in 
population between 1890 and 1900, despite the rapid growth of the total 
population. There is a strong tendency, moreover, toward the localization of 
certain branches of production in certain clearly defined districts. Interesting 
data regarding these phenomena are given by the Twelfth Census. But as 
these changes take place within the nation, and one part gains what the other 
loses, there is no need for governmental intervention. 



NATIONAL INTERESTS 323 

this is all the more absurd when we bear in mind that the 
problem of international trade is fundamentally only a 
question of economic and commercial supremacy. The part 
played by the nations of the earth, however, is by no means 
confined to that of economic productivity. Shall we incur 
the risk of perhaps eliminating a new Greece from among 
the nations of the world simply because her arid soil may 
not enable her to produce goods as cheaply as her rivals ? 

(2) Let it be granted that in the struggle for supremacy 
no nation would succumb entirely, and that each nation would 
succeed in finding some branch of production in which it 
could retain its superiority, and to which all its productive 
energies would be devoted. Could this be called a desirable 
state of affairs ? The free trade school replies affirmatively, 
because it considers this result as a vast application of the 
division of labor. Free traders delight in regarding the 
universe as an immense work-shop in which each nation pro- 
duces but one kind of goods, namely, those which it can by 
nature produce best and most easily ; they contend that such 
a system would effect the completest utilization of the pro- 
ductive forces of our planet and of humanity. Thus France 
would produce only fine wines and objects of art, England 
would make textiles, China would raise only raw silk and tea, 
Japan would raise rice and raw silk, Australia would devote 
her productive energy to wool, Switzerland to silk goods, 
Russia to wheat, Spain to olives and fruit, Belgium to fire- 
arms, Scandinavia to dairy products, Brazil to coffee, Canada 
to lumber, Austria-Hungary to leather goods, and the United 
States to raw cotton. 

But in this case the national interest is entirely sacrificed 
to a supposed " general " interest which is purely an abstrac- 
tion. Such an ideal as this, — admitting that it could be 
realized, — would involve the degradation of all nations and 
consequently that of the whole human race. It has been 
found that for individuals specialization in a single kind of 
work is liable to prove disastrous to physical, intellectual, 



324 PRINCIPLES OF POLITICAL ECONOMY 

and moral development. What, then, would be its effects 
for a whole nation ? A country in which all persons were 
engaged in the same occupation would be nothing more than 
an amorphous mass, a monstrous thing without intelligence 
and without vitality. Biology teaches that the development 
of an organism and its rank in the scale of life are directly 
determined by the variety and number of its functions and 
the differentiation of the organs that perform these functions. 
Exactly the same is true of a nation. If it would seek to rise 
to the level of a high and genuine civilization, it must en- 
deavor to encourage all forms of social activity, all manifesta- 
tions of national energy, and it must therefore take care that 
foreign competition does not destroy them one after the 
other. 

(3) The importation of foreign products, if not counter- 
balanced by a corresponding exportation of our own products, 
is likely to ruin a country by removing its money and reducing 
it to the position of a debtor nation. The importing nation 
will pay with money so long as it possesses any, whereupon 
it will be compelled to borrow the money required to pay for 
its purchases abroad. Indeed, this money may be borrowed 
from the very nations to which it must be paid ; in which 
case the situation becomes worse than before, because there is 
thus added to the debt incurred by imports the debt made by 
borrowing money and the necessity for paying interest on it. 
A country may in this manner be steadily and surely hastened 
toward bankruptcy. Such, for example, has been the experi- 
ence of Portugal and Turkey. 1 

Political economy, it is true, teaches that imports sooner 

1 This was the sense in which Cato declared : Patrem familias vendacem, 
non emacem esse oportet. (" De Agricultura. " ) The Mosaic law says : " Ob- 
serve to do all the commandments which I command thee to-day. . . . thou 
shalt lend unto many nations, but thou shalt not borrow ; and thou shalt 
reign over many nations, but they shall not reign over thee." (Deuteronomy 
xv. 6.) This command, to be sure, refers to loans and not to sales ; but 
these are ultimately the same, inasmuch as a purchasing nation in the long 
run always becomes a debtor nation. 



AMERICAN ARGUMENTS FOR PROTECTION 325 

or later give rise to exports. But this law — admitting its 
validity as clearly established — - is not sufficient to reassure 
protectionists. In fact, our explanation (page 299) demon- 
strated that although imports inevitably lead to exports, they 
do this by effecting a rise in the rate of exchange, an outflow 
of metallic money, and a general fall in prices. All these 
effects are very detrimental to a nation. They are, moreover, 
singularly aggravated when a nation, in order to meet its 
obligations, has recourse to loans. 

(4) Protectionists advance the fiscal argument that cus- 
toms duties are the best kind of taxes, because they are 
paid by foreign countries. A nation should therefore not 
hesitate to impose them, since they are advantageous not 
only as protecting home industries, but also as procuring 
resources without any cost to the citizens of a nation. 

The above arguments in favor of protection may be regarded 
as typical ; we encounter them in one form or another in every 
country where the problem of a commercial policy has given 
rise to controversy. Nowhere, however, has the problem of 
international trade been discussed more persistently than in 
the United States. Here it has been for many years in the 
foreground of political discussion and has received an amount 
of public attention beyond all proportion to its real and relative 
importance. Innumerable theories, some absurdly naive and 
others bewilderingly elaborate, have been advanced in this 
country in defence of "protection" or of "free trade." 

While it is of course entirely beyond the scope of this vol- 
ume to attempt anything like an exhaustive discussion of 
the problems involved, it may not be amiss, before termi- 
nating this section, to give a brief statement of some of the 
theories that are most frequently employed in the United 
States in defence of protection. 

It is often claimed that a restrictive policy is a wise economy 
of the labor of the people. " The national economy of labor," 
says R. E. Thompson, " consists not in getting on with as 
little as possible of it, but in finding remunerative employment 



326 PRINCIPLES OF POLITICAL ECONOMY 

for as much of it as possible. If labor be the source of wealth, 
then that country must advance to wealth which has work 
for all who are willing and able to do it." x The greater the 
variety of industries, the more the demand for labor and the 
better the labor is paid ; for instead of two workmen com- 
peting for every job, we shall have two masters, two sorts of 
masters, running after every workman. The creation of a 
diversified industry, furthermore, introduces such a change 
into farming itself as enables the farmer to employ a greater 
variety of labor. A home market takes the place of the dis- 
tant one, and crops are grown which require more care and 
attention, but which bring larger profits. Farming passes 
out of its wasteful extensive phase into the intensive stage, in 
which its operations are more productive and profitable. 

The natural drift and bent of the American character toward 
the mechanic arts and the inventions that facilitate them, 
would, in the absence or the undue subordination of the 
manufacturing industries, find little or no vent; the strongest 
side of the national intellect and the brightest gifts of the 
people would have no opportunities for development. 

Protection to industry is as much needed by the farmer as 
by the manufacturer. Just as the laborer's prosperity is 
measured by the relation of his wages to current prices, and 
not by the latter alone, so the farmer's is measured by the 
relation of the price of raw materials to the price of manu- 
factured goods, — including food under the former, — and 
not by the price of either one alone. Wherever the manu- 
facturer is found at work, the prices of the two converge; 
wherever he is found wanting, and the farmer stands alone, 
their prices diverge. When, in accordance with the classi- 
cal or cosmopolitan theory, some nations produce almost 
exclusively raw materials, and exchange them for manu- 
factured goods from abroad, one side pays for the trans- 
portation of bulky articles over great distances, while the 
other pays for the transfer of goods of the same value but 
1 R. E. Thompson, " Political Economy" (Philadelphia). 



AMERICAN ARGUMENTS FOR PROTECTION 327 

more compact form. The producer of food and of raw mate- 
rials has to bear the heaviest burden of this sort, namely, 
the cost of transportation for bulky commodities. 

Protection to industry gives the farmer a near, abundant 
and steady market for his breadstuffs, and creates a market 
for crops more remunerative than grain. The principal 
European market for our wheat and corn is furnished by 
England and is the most unsteady market that can be 
thought of. 

Whatever policy increases the number of those that are not 
engaged in farming, but must live on its products and pay for 
them, is the one which secures to the farmer the best and 
steadiest remuneration. The creation of a varied industry, 
moreover, enables the farmer to enrich himself without im- 
poverishing the soil, whereas his dependence on foreign 
markets leads him to produce crops that exhaust the soil and 
that reduce his farm to a wheat factory or a corn factory. A 
variety of industries brings the farmer and the artisan close 
together and gives the former facilities for making returns 
to the soil that he would not otherwise enjoy. It makes it 
worth while to farm more carefully, through the certainty of a 
permanent local market. Protection, furthermore, diminishes 
the risk of farming by giving variety to its products. The 
farmer who depends on exportation puts, so to speak, " all 
his eggs in one basket " ; but when the consumer is close 
at hand, he can raise and sell a variety of crops. If some of 
these crops fail, others are likely to succeed. 

By bringing the producer and the consumer near to each 
other, the restrictive policy diminishes their need of the trader, 
and weakens his power over them. The heavy tax of transpor- 
tation is saved ; men are set free from that most laborious and 
unproductive occupation to engage in others which are pro- 
ductive, and which this very policy has called into existence. 

The protectionist regards domestic trade always as more 
profitable than foreign trade. He maintains that it is more 
desirable to employ American capital in producing some of 



328 PRINCIPLES OF POLITICAL ECONOMY 

the goods which we usually import, than to employ it in pur- 
chasing these goods from abroad. Therefore, he argues, we 
must remove the obstacles in the way of making manufac- 
tures at home profitable. A protective tariff does this, and 
is often the only way to create a varied industry in a new 
or poor country that could not otherwise possess it. John 
Stuart Mill, although he was one of the most ardent disci- 
ples of free trade, admitted that the superiority of one country 
over another in a particular branch of industry often arises 
from having begun it earlier. " A country," says Mill, " which 
has skill and experience to acquire, may in other respects be 
better adapted to the production than those earlier in the 
field ; and, besides, it is a just remark that nothing has a 
greater tendency to produce improvement in any branch of 
production than its trial under a new set of conditions. But 
it cannot be expected that individuals should at their own 
risk, or rather to their certain loss, introduce a new manu- 
facture and bear the burthen of carrying it on until the pro- 
ducers have been educated up to the level of those with whom 
the processes have become traditional. A protecting duty 
continued for a reasonable time will sometimes be the least 
inconvenient mode in which a country can tax itself for the 
support of such an experiment." 

Protectionists go so far as to assert that the competition of 
home producers in the protected industry soon reduces prices 
to a point that is not above the ordinary level of profits in 
other industries. Protection, they hold, simply overcomes 
the obstacles to cheap production, namely : the risk of en- 
gaging capital in large undertakings for which the home 
market is not secured ; the inexperience of the laboring 
classes, whose industrial education is an investment that pays 
only in the long run ; and the dela} 7 that is required to 
organize an industry and accumulate the capital that makes 
it possible to produce on a large scale. 1 

1 A good discussion of this point from the point of view of a free trader is 
given in Cairnes' " Some Leading Principles of Political Economy." 



AMERICAN ARGUMENTS FOR PROTECTION 329 

One eminent American economist, Professor S. N. Patten, 
has applied considerable ingenuity to the defence of pro- 
tection. Pie distinguishes what he calls " static " societies 
from " dynamic " societies, and regards the United States as 
the type of a "dynamic " society. Our ideal, he maintains, 
must stand in sharp contrast with the static ideal advocated 
by most free traders. " The older theories of economics have 
always pushed to the front the conception of a static society, 
in which all the various elements would harmonize and thus 
form the highest state of civilization. The ideal I wish to 
emphasize, on the contrary, is based on the changing dynamic 
conditions which are necessary for any people to pass through 
in its progress toward the highest possible social state. 
Whether we shall have a static or dynamic society is really 
the centre of the discussion about the tariff." 

" The American people are in a dynamic state. There is 
at the present time a constant growth of population, and 
hence an increased number of laborers must find employment 
in some way. We must therefore continually seek for new 
opportunities for labor in which this increase of population 
can find employment. . . . The American people should be 
more progressive than those of Europe. The soil we occupy 
is newer than that of Europe, the mines of which we make use 
are superior, and these conditions, coupled with the spirit of 
activity which fills the American people, should push us along 
into a higher stage of civilization much more rapidly that it 
is possible for the people of older civilizations to advance." 

Professor Patten does not believe that there is but one 
theory of political economy, the doctrines of which hold true 
for every civilization. The same forces, probably, are at 
work everywhere, but their relative importance varies with 
the industrial condition of each people. It is therefore quite 
possible that the best economic policy for America may be 
very different from that of other nations. 

" The world's progress is now dependent upon the develop- 
ment of internal resources, and not of external trade. We 



330 PRINCIPLES OF POLITICAL ECONOMY 

need a systematic development of all those opportunities for 
labor with which each country has been endowed by nature. 
We must make a better use of all our natural resources if the 
world is to advance to a higher industrial state. Progress 
must come from the development of large continental nations, 
rich in natural resources. Small nations, deficient in many of 
those natural resources needed for a nation's development, 
must rely largely upon trade to obtain those things in which 
their resources are deficient. To such a nation the profits of 
trade can to a large degree be accepted as the criterion of 
national prosperity ; but large continental nations must look 
nearer the real source of national prosperity to obtain their 
criterions. They must become successful by the development 
of their natural resources. Their land and their mines must 
be opened up and the productive capacity of each laborer 
must be increased." 

In answer to his own query, Shall the ideal of American 
civilization be national or cosmopolitan? Professor Patten 
declares that " nationalism is a dynamic movement, and seeks 
to bring each nation through a series of changes and develop- 
ments that would bring a better harmony between its social 
conditions and its economic environment. It assumes that 
each nationality through differences of climate, soil, and other 
natural conditions has an economic environment peculiar to 
itself to which a particular type of man is best adjusted, and 
that a series of nations of different types, each fitted to its 
own environment, will make a better use of the world and 
reach a higher civilization as a whole than any one type could 
if it endeavored to occupy the whole world and retain the 
common characteristics. . . . Adjust the people of each 
nation to its own environment and mankind will be better 
adjusted to natural conditions of the whole world than in any 
other way." 1 

1 S. N. Patten, " The Economic Basis of Protection " (Philadelphia, 1890). 



THE ARGUMENT FOE, TUTELARY PROTECTION 331 

VII. The Doctrine of Free Trade 

Free traders usually begin by refuting the arguments just 
enumerated. 

The argument drawn from the dangers of free competition, 
they admit, produces a great impression. But, observe the 
free traders, note what singular changes this argument has 
undergone, and to what contradictions it leads ! Formerly 
it was maintained that the weak must be protected against 
the strong, the young countries against the old. Thompson, 
for instance, declared that protection aims to overcome the 
initial obstacles in the way of founding new and diversified 
industries. This was known as tutelary protection, designed 
to educate labor and capital in hitherto untried occupations, 
and in the United States was known as " protection to infant 
industries." It was remarked that young industries have to 
contend with great disadvantages, — that it is not easy for 
them to withstand the competition of enterprises already 
in possession of vast markets, and therefore enabled by reason 
of extensive production to carry the division of labor and 
large-scale methods to the highest degree of perfection. The 
struggle is all the more difficult for the reason that in new 
countries wages are high and capital is relatively scarce. 
It is well known that young trees cannot easily be made to 
grow in close proximity to old ones, because the latter, hav- 
ing already taken all the light from above as well as all the 
nutriment of the soil, leave but little room for the others to 
take root or to stretch out their branches. 

The argument seemed plausible. It seemed to be borne 
out by the experience of new countries, such as Australia 
and Canada, which, although educated in the school of pure 
free trade, did not hesitate to raise up protective barriers 
against other countries, — even against England. 

The favorite example for protectionists the world over is 
the United States. Would American industries have grown so 
rapidly if they had been obliged in the beginning to struggle 



332 PRINCIPLES OF POLITICAL ECONOMY 

unaided against English manufactures ? Would they not 
at the very outset have been driven from the field ? Per- 
haps so. 1 But the United States has brilliantly accomplished 
its economic evolution in this respect, and now ranks among 
the greatest manufacturing nations of the earth. And now 
that the nation is strong industrially, and its " infant indus- 
tries " have been fostered to maturity, has it torn down the 
protective barrier which sheltered them in their infancy ? 
By no means ! Mr. David A. Wells declares expressly that 
" there has never been an instance in the history of the coun- 
try where the representatives of such [infant] industries, 
who have enjoyed protection for a long series of years, have 
been willing to submit to a reduction of the tariff, or have 
proposed it. But on the contrary, their demands for still 
higher and higher duties are insatiable and never inter- 
mitted." Americans continue the protectionist policy, and 
at the same time abandon the infant industry argument as 
unworthy of a great industrial nation. By an inverse argu- 
ment they now declare that a nation that is advanced in 
civilization, that is wealthy and in the habit of paying high 
wages to its laborers, must be protected against nations pos- 
sessing a retrograde civilization and paying low wages for 
labor. 2 

" Protection," says Professor Patten, in so many words, 

1 According to free-trade authorities, principally Professor F. W. Taussig, 
the low duties prevailing during the thirty years before the Civil War (the 
so-called "era of free trade") do not seem to have checked the growth of 
manufactures. " In general," says Professor Taussig, " the extent to which 
mechanical branches of production have been brought into existence and 
maintained by the protective system is greatly exaggerated by its advocates ; 
and even the character and direction of their development have been influenced 
less than, on grounds of general reasoning, might have been expected. 

2 American economists point out that just as Europe and Asia lower the 
American standard of civilization and living by sending their poor and fam- 
ished emigrants to the United States, so also they are working toward the 
same result by sending us their cheap products. Both our higher civiliza- 
tion and our higher wages must be defended against the invasion of cheap 
labor and the importation of goods produced by cheap labor. 



WHO NEEDS PROTECTION ? 333 

"now changes from a temporary expedient to gain specific 
ends to a consistent endeavor to keep society dynamic and 
progressive." Or, in the words of another protectionist 
writer, " the products of America do not need protection 
against those of England because the products of our indus- 
tries are younger, but because they are made under a higher 
civilization." 1 

Meanwhile, the nations of Europe declare that a high tariff 
barrier is indispensable to them precisely because they are 
old and require protection against the dangerous competition 
of new countries possessing the advantages of a cheap virgin 
soil and low taxes. 

Hence, free traders ask : What conclusion must be drawn 
from this varied application of the protectionist argument? 
To whom is protection really necessary ? Do the weak need 
it against the strong, or the strong against the weak ? Do 
new countries require it against old ones, or the old against 
the new ? What are we to think of an argument that is 
made to serve equally well for the defence of two exactly 
opposite doctrines ? 

Free traders regard the fear that a nation could ever be 
depopulated by international commerce as vain and absurd. 
The awful protectionist picture 2 of a nation dislodged by 
foreign competition from all the branches of production suc- 
cessively, — a nation reduced to the necessity of letting its 
soil lie -fallow, and seeking an asylum within the boundaries 
of a successful competitor, — they consider unutterably fan- 
tastic. No country, however unfortunate, is likely to be 
inferior to others in all the branches of production. And if 
such a case should ever occur, if ever a nation were so 
harshly treated by fate or by nature as to be forced to work 
harder on its own land in order to live, than anywhere else, 
certainly the prohibition of foreign imports would not make 
it any richer or happier. In such a case as this, laborers and 
capitalists would soon discover the path that leads to better 

1 George Gun ton, " Social Economics," page 338. 2 See page 322. 



334 PRINCIPLES OF POLITICAL ECONOMY 

countries ; and to prevent them from taking it would require, 
not a barrier of duties on imports, but a prison wall. 

It is forgotten, moreover, in this argument, that inter- 
national commerce tends always to take the form of barter. 
Every importation occasions a counter-current of exporta- 
tion ; for how can a nation be supposed to buy abroad with- 
out giving anything in exchange, — unless we assume that 
foreign nations will furnish their products gratuitously, in 
which case the situation of the importing nation would be 
more enviable than pitiable, and such a process as this could 
not possibly ruin it. If, in reality, any nation is too poor to 
send goods abroad, we may be perfectly sure that foreign 
countries will take care not to export anything to it. 

When protectionists claim that the possession of a large 
quantity of money is a great advantage, and that protective 
tariffs, by discouraging imports, tend to create a favorable 
" balance of trade," they overlook the fundamental nature of 
international trade. To be sure, there are periods when a 
nation may sell more than it buys abroad, and will therefore 
collect a balance in money. But the accumulation of money 
in one country and its withdrawal from another will cause 
high prices to prevail in the former country and low prices in 
the latter. The former country thus becomes a good market 
in which to sell, and a bad market in which to buy ; people 
will ship more goods than they would if the high prices did 
not prevail, and will take fewer goods from it ; they will 
withdraw gold from the place where prices are high, for use 
in the place where prices are low. The experience of four 
centuries has demonstrated the futility of trying to interfere 
with this movement of specie. On the other hand, the same 
forces make it impossible or improbable that a nation will 
ever be drained of its metallic money by international trade. 1 

1 We have already explained why this is so. Even in the case of the 
South American Republics the cause for the scarcity of metallic money must 
be sought in the abuse of the credit system and issues of paper money, rather 
than in foreign imports. 



WHO PAYS THE DUTY? 335 

It is absurd, moreover, to pretend as a general doctrine 
that protective tariffs are paid by foreign nations, and that 
they mean an increase of the public revenue without consti- 
tuting a burden on the nation which imposes them. 1 How 
exceedingly convenient it would be if a nation could provide 
itself with a revenue simply by taking money, as it were, 
from the pockets of foreign exporters ! Supposing that a 
government really possessed this remarkable power, is there 
not every reason to believe that it would not long remain a 
secret confined to one nation? Would not all nations hasten 
to adopt this excellent means of providing a revenue by 
shifting the burden of taxation to the shoulders of foreign 
competitors? Thus, when all nations had adopted protec- 
tive duties as devices for taxing foreign countries, none 
would be better off than another, and their relative positions 
would be the same as before. 

It is true that under exceptional circumstances the burden 
of customs duties may really be borne by foreign exporters. 2 
But as a general rule, and by virtue of what is known as the 
shifting of taxation, every tax paid by a producer or by a mer- 
chant is ordinarily transferred to the purchaser of the taxed 
goods and is ultimately paid by the consumer. This shifting 
of the burden from producer to consumer is even more likely 
to be effected in the case of foreign than of native products. 

1 See page 325. 

2 This case was pointed out by John Stuart Mill. Every rise in prices in- 
tails a reduction of consumption. If the article in question is a foreign prod- 
uct, the foreign producer will be compelled to consider whether it would not 
be advisable to make a sacrifice of part of his profits and reduce the price of 
his goods to the extent of the tariff, in order to retain all his customers by 
permitting them thus to buy the goods at the former price. It is evident that 
if the price is increased, many former purchasers will not continue to buy. 
Hence the producer must face the alternative of decreasing his sales or reduc- 
ing his prices to the extent of all or part of the duty. All things consid- 
ered, it is not unlikely that in some cases his interest will lead him to choose 
the second alternative. But in order that foreign producers shall submit to 
this burden, two conditions are requisite : (a) the cost of production must 
be low enough to permit a reduction in the price received by producers ; 
(6) producers must be unable to dispose of their goods in other markets. 



336 PRINCIPLES OF POLITICAL ECONOMY 

But let us for a moment admit the entire validity of the 
protectionist argument that protective duties are really 
borne by the foreign producer and exporter. What will be 
the result ? Evidently, the price of the imported goods will 
not be changed, inasmuch as the duty is paid by the pro- 
ducer, and not added to the price which must be paid by the 
consumer. Consequently, the competition of foreign goods, 
and the discouraging influence of this competition on home 
industry, will in no wise be diminished. Therefore, home 
industries will attain none of the objects for which protection 
was considered desirable ; protective duties will neither ex- 
clude foreign goods nor raise prices. Hence, to the many 
arguments already brought against protection, we must add 
the objection that it does not protect. Protective duties, 
if they were borne by the foreign producer, would accom- 
plish absolutely none of the objects for which they are 
established. 

The oft-repeated argument that protection is needed to 
diversify the occupations of a people rests on the hypothesis 
that it is impossible for manufacturing industry to exist in 
a young country unless it receives fostering aid. But this 
hypothesis is unwarranted. When a country is first settled 
and sparsely populated, it possesses no sufficient supply of 
labor for the establishment of manufactures on an extensive 
scale. Gradually, however, as population increases, there 
will arise various branches of domestic industry which will 
supplement and assist in various ways the labor of those who 
are engaged in agriculture. With the cultivation of less 
accessible and poorer lands, the gains of farming continue to 
decrease, and the law of diminishing returns gives rise to the 
application of capital and labor to manufactures and trans- 
portation as soon as any department of these occupations 
offers promise of greater remuneration than that procured in 
farming under the least favorable circumstances. The im- 
position of protective duties, however, introduces a disturb- 
ing element, and induces labor and capital to engage in less 



THE DIVERSIFIED INDUSTRY ARGUMENT 337 

profitable branches than they would otherwise have chosen. 
To the extent that they effect this diversion of labor and 
capital, they imply production carried on under more onerous 
conditions. The practical result will be not only a general 
rise of prices, but an increase in the cost — cost, be it remem- 
bered, in the sense not of mere money outlay, but of actual 
difficulty, of real sacrifice — of producing goods. These 
higher prices (or this higher cost) are paid by whom ? There 
is only one possible answer : By the people of the protectionist 
country. Thus tariffs seek to accomplish at great cost what 
would otherwise have been effected spontaneously and far 
more cheaply by the natural evolution of industry in such a 
country as the United States. 

Having regard to the geographical position, extent of ter- 
ritory, and extraordinary natural resources of this country, 
as well as to the character of its people, trained in all the 
arts of civilization and distinguished beyond all others by 
their eminent mechanical and business talents, there seems 
no valid reason why we should not take a position of com- 
manding influence in the world of industry and commerce, — 
a position to which no other people on earth could aspire. 
But if we desire to command a market for our products in 
all quarters of the world, we must be prepared to admit the 
products of other countries freely to our own markets, and 
must learn to seek the benefits of international trade not in 
the vain ambition of making other countries pay tribute in 
gold and silver, but in that which constitutes its proper end 
and only rational purpose, — the greater cheapening of com- 
modities, and the increased abundance and comfort which 
result to the whole family of mankind. 

The argument that protection produces economy by having 
goods consumed near the point of production, is in a large 
measure fallacious, for if people import an article from a 
distance it shows that the difference in price more than 
covers its cost of transportation. Therefore, the economy 
of importing goods must be sufficiently great to cover the 



338 PRINCIPLES OF POLITICAL ECONOMY 

expenses of the whole trading class ; else goods would not be 
imported. The idea advanced by some protectionists that 
the exporting nation bears the burden of transporting goods, 
since the exporters of raw products consequently bear a 
heavier burden than exporters of manufactured goods, is 
equally unfounded. In order to prove the fallacy of this 
assumption, let us inquire what would be the effect of reduc- 
ing from 20 cents to 10 cents the cost of transporting a 
bushel of wheat from New York to Liverpool. If, after 
this reduction in freight, American wheat continued to sell 
in England at the same price as it did before, the profit 
realized on every bushel of American wheat sold in England 
would be increased by 10 cents. This opportunity of secur- 
ing extra profit would inevitably cause increased supplies of 
American wheat to be sent to England, and this would con- 
tinue until the price of American wheat was so much reduced 
in England that it was not more profitable to sell it there 
than in America. The difference in the price of wheat in 
New York and in England cannot be permanently greater 
than is the cost of exporting wheat from New York to Eng- 
land. If therefore this cost is reduced, the price of American 
wheat in England must be also reduced by nearly an equiva- 
lent amount. The fall in price would not probably be quite 
equal to the reduction in the cost of carriage ; because as 
American wheat became cheaper in England, the demand for 
it would become greater, and this increase in demand might 
produce a slight rise in its price in America. It still, how- 
ever, is certain that a lessening of the cost of carriage would 
produce an almost equivalent reduction of price in the im- 
porting country ; it follows, therefore, that the cost of car- 
riage, instead of being borne by the exporting country, falls 
almost entirely upon the importing country. The first effect 
of a rise in the freight between America and England obvi- 
ously would be to increase the price, to the English consumer, 
of wheat and all other products imported from America. 
The immediate effect of levying a protective duty upon a 



PROTECTION AND PRICES 339 

foreign product is to increase by the amount of the duty the 
expense of importing the commodity. This means that the 
foreign product must be sold at a higher price. If the foreign 
product formerly sold at $1.00 and the duty is 50 per cent, 
the result Will be to raise the price of the article to about 
$1.50. This is the very object of the duty, for the increased 
price is intended to induce domestic producers to engage in 
the industry. If domestic producers could have made a fair 
profit before the duty was imposed, there is manifestly no 
need to encourage capital to engage in this industry by offer- 
ing the inducement of artificially high prices. Protection, 
therefore, by causing artificially high prices, cannot undei 
any circumstances be regarded as conducing to cheaper 
production. Very few of our " infant industries " regard 
themselves as self-supporting, and the industry that is not 
self-supporting causes a permanent economic waste to the 
whole community. Repeatedly, moreover, domestic pro- 
ducers in this country have combined to raise prices behind 
the barriers of the protective tariff. Suppose, for example, 
that foreign goods can be sold here at $1.00, and that a 
duty of 50 cents is imposed in order to preserve the home 
market for our own producers. In this event foreign 
goods cannot be sold here for less than $1.50. Now sup- 
pose that improved methods of production have made it 
possible for American producers to sell this article profit- 
ably at $1.25. If they form a combination, they can keep 
the price at a level far above the cost of production plus a 
reasonable profit ; they could, in the example here given, keep 
the price at $1.49, because the duty excludes foreign com- 
petition at any price less than $1.50. As a matter of fact, 
a number of our important products are now regularly sold 
to foreign customers at prices lower than those charged to 
American consumers. Our supposition is therefore no purely 
imaginary one. 

When there is no such combination among American 
producers as that adverted to, the article above referred to 



340 PRINCIPLES OF POLITICAL ECONOMY 

will sell for $1.25, if domestic producers can supply all the 
domestic demand. In this case domestic consumers bear 
a burden of 25 cents on each article bought. In any ease, 
domestic consumers are sure to bear a burden proportionate 
to the greater expense at which the domestic article is pro- 
duced. This burden on consumers ceases only when the 
domestic money cost of production becomes as low as the 
foreign cost, — and then the protective duty is no longer 
needed. 

The essential features of the free-trade argument may be 
summed up in the following five points : — 

(1) From the view-point of consumption, protective duties 
tend beyond all question either to actually increase the cost of 
living or to prevent its decrease. Living certainly is cheaper 
in free-trade countries like Belgium and England, or semi- 
free-trade countries like Switzerland, than in the United 
States or in France. 

Import duties usually cause an increase not only in the 
price of imported goods upon which the duty is levied, but 
in the price of all similar goods consumed within the country. 
In this way the public pays, out of its own pocket, in the 
guise of increased prices, much more than the government 
actually collects in customs duties. Suppose for instance 
that France imports 40,000,000 bushels of wheat, and that 
this wheat is worth, at the port of arrival, $1.00 per bushel. 
Because of foreign competition in wheat, the 300,000,000 
bushels raised in France will also bring only $1.00 per bushel. 
This is precisely why French farmers complain. Now sup- 
pose that in accordance with the demands of the agricul- 
turists, a duty of 50 cents per bushel is levied on imported 
wheat. 1 The government will then collect, through its cus- 
toms officials, (provided the duty has not reduced imports) 
the sum of $20,000,000. But consider the position of the 

1 The strongest advocates of protection in France and German}'' are the 
agricultural classes. In Germany their influence has recently resulted in the 
passage of a high protectionist duty on imported cereals. 



PROTECTION AND PRICES 341 

general public. Wheat consumers will now bear an addi- 
tional burden of 50 cents per bushel of foreign wheat, or a 
total of $20,000,000, — the amount paid to the government. 
But this is not all ; the consumers will pay considerably 
more than this. French producers will naturally sell their 
wheat at the same price as foreign wheat, and the French 
people will therefore pay 50 cents more for every bushel 
of wheat raised in France, that is, an additional sum of 
$150,000,000. Above and beyond the amount brought into 
the government treasury, 1150,000,000 must be paid by the 
public to native wheat-growers ; thus the consumers will be 
compelled to bear a total burden of $170,000,000, because of 
the protective duty on wheat which increases the govern- 
ment revenues by merely $20,000,000. 

It is true that the inverse effect may take place. It may 
happen that the protective duty, by keeping prices at an 
artificially high level, will give an excessive impetus to pro- 
duction, and then, because of relative overproduction, again 
entail a fall in prices. At the present time this very phenom- 
enon is taking place in France with regard to wine-growing. 
The high duty put on foreign wines, and the subsequent 
rise in prices, led to so great a production of wine that it 
exceeded the demand and resulted in the failure of many 
wine-growers to dispose of their goods. The same result, 
although on a smaller scale, has taken place in French wheat- 
production. 

When such effects as these are the result of protective 
duties, wherein does their advantage consist? Is it an ad- 
vantage for a country to be inundated with its own products 
rather than with foreign goods? Is it not true, on the 
contrary, that overproduction at home is worse than over- 
production abroad, so far as we are concerned ? For against 
foreign overproduction we can defend ourselves very simply 
by purchasing no more than we require, whereas the refusal 
to buy native products will cause the ruin of some of our 
fellow-citizens. 



342 PRINCIPLES OF POLITICAL ECONOMY 

(2) From the point of view of distribution, protective 
duties create injustice, because their effect is to guarantee 
an increased income to the producers of protected goods. 
And this favoritism is all the more objectionable in view of 
the fact that most governments persistently refuse to grant 
to laborers a legal minimum wage. 

(3) Even from the standpoint of national production, 
which protective duties are supposed to foster and sustain, 
free traders contend that these duties really do an incontest- 
able injury to home production by increasing the cost of raw 
materials (whenever there are duties on raw materials), im- 
plements, machinery, and all the equipment of productive 
enterprises. 1 We have already explained that all protective 
duties, whether on raw material or on manufactured goods, 
invite capital away from industries in which a nation has 
unparalleled advantages into industries where facilities are 
not so good. Their immediate effect, therefore, is to de- 
crease the productivity of a nation's capital and labor by 
turning it from its natural channels into protected industries 
and thus causing economic loss. 

It has been observed that when once any industry is pro- 
tected there immediately arises the necessity to protect others, 
which are handicapped by having to pay higher prices for some 
of the goods they require. " Fire," says Fawcett, " is not 
more certain to spread amongst inflammable material than 
is protection, when once sanctioned, to embrace a constantly 
increasing number of industries within its influence. Each 
new protective duty that is imposed inevitably creates a 
demand for protection in other industries." Free traders 

1 Sometimes goods are admitted to a country free of duty on condition 
that they shall be reexported in a different form within a given space of time. 
Thus some countries admit iron, wheat, etc., free of duty on condition that 
they be reexported as manufactured goods. The producer importing these 
goods must give some guarantee that they shall be exported again within a 
given period. 

Drawbacks are duties which are repaid when goods brought into the 
country are again sent out of it. They are merely restituted customs duties. 



FREE TRADE AND PRODUCTION 343 

assert, moreover, that nothing is better calculated to exert 
a deteriorating influence on a country than to encourage its 
industrial classes to be perpetually looking to the state for 
assistance. " This continual law-making about industry has 
been prolific of industrial and political mischief. It has 
tainted our political life with log-rolling, presidential wire- 
pulling, lobbying, and custom-house politics. It has created 
privileged classes in the free American community, who were 
saved from the risks and dangers of business to which the 
rest of us are liable." 1 

(4) From the commercial point of view it has been noted 
that protective duties reduce imports and thus simultaneously 
tend to reduce exports. Hence they are entirely incompati- 
ble with the efforts made to faciliate intercourse between 
nations by building tunnels through mountains, construct- 
ing canals, spanning the seas with lines of subsidized ships, 
laying telegraphic cables, encouraging international exposi- 
tions, and establishing international monetary regulations. 
Can anything be more absurd than to spend millions for dig- 
ging canals and building roads, and then stationing customs 
officials at both ends or at the principal sea-ports of the 
nation in order to restrict the passage of as much merchandise 
as possible ? 

(5) From the point of view of industrial progress free trad- 
ers hold that protective duties slacken progress by remov- 
ing or attenuating foreign competition. Prince Bismarck in 
one of his political speeches spoke of those pike-fish that are 
sometimes placed in carp-ponds to keep the carps on the alert 
and prevent them from burying themselves in the mud. The 
comparison would be entirely appropriate in this connec- 
tion. For a country to retain its rank as a great industrial 
and commercial power, — and this is precisely the aim of 
protectionists, — it must constantly renew its industrial 
equipment and eliminate those methods and implements that 

1 W. S. Sumner, "Lectures on the History of Protection in the United 
States." 



344 PRINCIPLES OF POLITICAL ECONOMY 

are not entirely up-to-date. This necessity is always more 
or less unpleasant to producers, and it is extremely question- 
able whether they would feel it or submit to it with good 
grace unless they were forced to do so by the pressure of 
foreign competition. 

Thus far the free traders appear to have the better of the 
discussion. But there are two other arguments for protec- 
tion that have considerable force, and that cannot be put 
aside so easily as the preceding ones. 

The first — which we have already suggested — lies in the 
fact that a nation, having the right to exist as a nation, also 
has the right and the duty to develop all the dormant possi- 
bilities of economic development that lie within it, — agricul- 
tural, industrial, and commercial. It should strive to make 
the best, the completest, and the most diversified use of its 
soil, its climate, and the qualities of its population. It should 
not be willing merely to become a wheel in the universal 
mechanism, but should develop and preserve its own peculiar 
genius and native characteristics. 

Protection may therefore be regarded as a kind of disci- 
pline, like that which prevents a pupil from having his tasks 
done by a companion more able than he and which thus 
obliges him to do them himself. Its purpose is not to raise 
prices, but to increase home production sufficiently to meet 
all the needs of the nation. 

There is of course some truth in this argument. But, it 
may be asked, is not free trade a superior " educative " system 
by virtue of the severer discipline to which it subjects home 
industry and agriculture ? Is it not better adapted to the 
development of the unknown resources of a country ? This 
question cannot be answered dogmatically ; it is one that 
each country must answer according to its own peculiar tem- 
perament and ideals. 

The second argument is that the deplorable state of immi- 
nent war, or at least of armed peace, that characterizes the 



NATIONAL DEVELOPMENT AND DEFENCE 345 

beginning of the twentieth century has created an abnormal 
situation and temporarily justifies the system of protection. 
As we happen to be living in a barbarous epoch wherein all 
nations fear the possibility of an almost universal war, it is 
natural that each country should defend the industries that 
are indispensable to its own safety. These indispensable 
industries include not only the production of weapons and of 
food, but also that of the coal which is necessary to propel 
trains and vessels, as well as the iron, horses, wheat, meat, 
cloth, leather, and all that is directly or remotely necessary 
to equip and maintain thousands of men under arms. Eng- 
land, to be sure, imports more than half her food supply from 
abroad ; but she dares do this only because she is mistress of 
the great maritime routes, and because she expends colossal 
sums of money in order to retain her naval superiority. If 
ever she had reason to fear that her maritime intercourse 
might be interrupted, there is no doubt that she would at 
once adopt measures for increasing her agricultural produc- 
tion, even though artificial encouragement were found neces- 
sary. Considering the vast proportions which modern 
warfare would probably assume, and the probability that 
nearly the whole adult male population of belligerent nations 
would be brought under arms, as well as the likelihood that 
all the economic resources of the nation would be drawn upon, 
it may be truthfully said that every occupation aids to some 
extent in the national defence. 

Granting all this, we must nevertheless inquire whether 
protection does not have precisely the effect of creating the 
danger against which it pretends to defend us. Is not a 
" tariff war " likely to provoke war of the bloodier sort ? 
And would not free trade have the opposite effect by making 
war almost impossible ? A long time ago, Montesquieu said 
that "the natural effect of commerce is to produce peace." 

At all events, if protection is accepted as a military neces- 
sity, it must then be considered as a supplementary expense 
added to the war budget, and not as a national revenue. 



346 PRINCIPLES OF POLITICAL ECONOMY 

Thus, one American economist calculated that a certain spin- 
ning mill had cost the country more than an armed cruiser. 
This manner of considering the subject does not appeal to 
protectionists ; they prefer keeping up the illusion of imagi- 
nary gains for the nation. But why should they fear to be 
frank ? It would be better to declare boldly that protective 
duties and tariff wars are fully as good as armed peace and 
actual warfare. They are, perhaps, quite as expensive ; but 
they may be necessary means for obtaining a due share in 
the world's prosperity and influence. 

VIII. The Relative Importance of Foreign and 
Domestic Commerce 

Whatever may be the theoretical merits of the policy 
of unrestricted foreign trade or of that which would erect 
tariff barriers between nations, it would be unjustifiable to 
leave this subject without calling attention to two matters 
which are often overlooked. 

The nations of the earth differ widely in area, population, 
the nature of their soil and subsoil, in the qualities of their 
inhabitants and in the genius of their institutions. All these 
elements must be taken into account in the discussion of a 
commercial policy. The size of some countries is such that 
they could under no circumstances aspire to national self- 
sufficiency in economic matters. The principality of Monaco, 
with an area of eight square miles and a population of 13,000, 
or the grand duchy of Luxemburg, with an area of about 1000 
square miles and a population of 218,000, would scarcely act 
wisely in cutting off foreign trade. This is equally true 
of Denmark, Switzerland, Belgium, Portugal, Greece, Hol- 
land, Norway, and Sweden, with populations ranging lxhi 
2,000,000 to 6,000,000. There is but little variety in tU 
products of these nations. Because of their limited siza 
the uniformity of their climate and their soil, they lack a 
large number of raw materials. If these nations undertook 



DIFFERENCES AMONG NATIONS 347 

to produce all kinds of commodities for themselves, the di- 
vision of labor would necessarily be of the crudest sort. 

Countries possessing large territory, but a very sparse popu- 
lation—like the Argentine Republic and Brazil — are in a 
somewhat different position, but one which is nevertheless 
not altogether unlike that of the above-mentioned countries. 
These vast territories contain unlimited and varied natural 
resources, but their small population, a great part of which 
consists of negroes or of uncivilized indigenous tribes, makes 
it impossible to carry out the division of labor to any great 
degree, except for a few branches of production. 

The domestic commerce of such nations as Belgium and 
Holland, for instance, is of less importance than their for- 
eign trade. The Dutch have become wealthy by importing 
and exporting goods, and their present principal source of 
gain is the forwarding trade. Norway has but few com- 
modities to sell, and must buy a multitude of things abroad. 
Denmark, Switzerland, and several other nations occupy a 
similar position economically. 

On the other hand, large nations, like Russia and the 
United States, possessing immense territorial dominions and a 
large population of varied character, are evidently in a much 
more favorable position for the development of their economic 
self-sufficiency. They form, as it were, economic worlds 
in themselves, and would suffer little loss from the interrup- 
tion of international trade. Russia, with an area of over 
8,000,000 square miles and a population of nearly 130,000,000, 
and the United States with an area of 3,000,000 square miles 
(excluding Alaska and our colonies) and a population of 
almost 80,000,000, evidently are not in the same category 
with Holland and Portugal. The United States occupies a 
compact strip across the Western Continent, extends from the 
subtropical regions to the region of long winters and short 
summers, and includes a greater variety of products than any 
other one country in the world. An elaborate system of 
communication and transportation, almost unlimited natural 



348 PRINCIPLES OF POLITICAL ECONOMY 

resources, and the singularly inventive turn of mind of our 
population, give the United States, with but one-fifth the 
population of China, a greater productive capacity than that 
country possesses. 

Under these circumstances it is not surprising that our 
foreign commerce sinks into insignificance when compared 
with our domestic trade. The total value of imports and 
exports of the United States for the fiscal year 1902 was 
12,285,040,349, and although this amount of foreign commerce 
was exceeded only by that of Great Britain and Germany, 
our domestic trade exceeded our foreign trade many times 
over. Within the borders of this nation lies the largest free- 
trade district in the world, with a volume of trade surpass- 
ing the entire foreign and domestic commerce of the United 
Kingdom. 

It is of course a more difficult matter to ascertain the 
extent of domestic commerce than that of foreign trade. As 
all goods imported and exported must pass through the cus- 
toms houses, where their kinds, quantities, and values go on 
record, the amount of foreign trade can be learned with com- 
parative exactness. The same is not true of domestic trade. 
" The railroads are required to keep an account of the 
quantity of freight they carry, but not of the value, and the 
kinds of goods are given only roughly. On the watercourses 
it is still more difficult to know what the trade is ; figures 
are published stating the number of tons of freight carried, 
but many of them are only estimated, and much freight never 
gets on record at all. If the long-distance traffic is thus 
imperfectly known, what shall be said of the local trade ? 
Farm wagons, drays, local express companies, and delivery 
wagons do the transporting when the customer does not carry 
away his purchases by hand ; only the dealers can give even 
an estimate of this business, and that they rarely do; still 
more rarely is the sum of the transactions of all dealers 
within a locality ever known with any degree of accuracy. 
Then there is a vast amount of trading in which merchants 



IMPORTANCE OF HOME TRADE 349 

have no part ; Peter and Andrew trade knives, two farmers 
in the backwoods trade horses, a gardener sells some potatoes 
to a neighbor — the volnme of such transactions can of course 
never be known. Our compilation of statistics for domestic 
commerce will therefore be attended with much uncertainty." 1 

Some figures, however, recently compiled by the Treasury 
Bureau of Statistics, which has become a part of the newly 
founded cabinet Department of Commerce and Labor, esti- 
mate the internal commerce of the United States at 
120,000,000,000, — more than the entire international com- 
merce of the world. In arriving at this estimate, the Bureau 
of Statistics includes only one transaction in each article pro- 
duced, whereas, in fact, a very large number of the articles 
produced pass through the hands of several middlemen before 
reaching the consumer. 2 The estimate is based on the figures 
of the Twelfth Census, which put the total value of manu- 
factures in 1900 at 113,000,000,000, those of agriculture 
at nearly 14,000,000,000, and those of minerals at over 
$1,000,000,000. Adding to these the products of the fisher- 
ies, the total value of the products of the great industries 
of 1900 would be $18,000,000,000. The rapid growth of all 
lines of industry since 1900, especially in manufacturing, 
seems to justify the conclusion that even a single transaction 
in all the products of the country would mean an aggregate 
for 1902 of nearly $20,000,000,000. 3 

Estimating the domestic commerce of the country at former 
census years by the same method, the Bureau of Statistics 
finds that our total domestic commerce has grown approxi- 

1 Clow, " Introduction to the Study of Commerce," p. 104. 

2 The term commerce applies only to the change of ownership, as we have 
explained ; therefore goods which are kept by the producer for his own use 
do not properly fall under the head of commerce. But the amount of goods 
so kept is relatively small and constantly decreasing. 

3 Mr. C. C. Adams,inhis " Commercial Geography," gives $28,000,000,000 
as the value of our domestic trade, without, however, explaining how he 
reaches this figure. The same author is authority for the statement that the 
people of the United States buy $40 worth of home products for every dollar 
they expend for foreign goods. 



350 PRINCIPLES OF POLITICAL ECONOMY 

mately as follows : 12,000,000,000 in 1850 ; 13,500,000,000 
in 1860; 16,250,000,000 in 1870 ; $7,750,000,000 in 1880; 
and $12,000,000,000 in 1890. It will be seen from this esti- 
mate that our internal commerce has increased 50 per cent in 
the decade from 1890 to 1900, and is ten times as large in 
1902 as in 1850 ; meanwhile, from 1850 to 1900, the popula- 
tion has increased three and one-half times. 

The foreign commerce of the nation has also increased 
during this period, but not quite so rapidly as domestic 
commerce. 

IX. Some Moderate Forms of Protection 

Is there no other system to accomplish the object for which 
customs duties are devised? Can there not be protection 
without protective duties ? Theoretically, yes ; by means 
of premiums to producers. 1 

This method seems to offer none of the objections to which 
a system of import duties gives rise ; it appears to be supe- 
rior to protective duties for the following reasons : — 

(1) Premiums can be graded at will, in such a manner as to 
protect those producers that most need protection, and not 
the others ; while customs duties often establish an unequal 
protection, insufficient for the weak and unnecessary to the 
strong. Premiums can be adjusted to the cost of production, 
which is seldom exactly the same in any two establishments. 
Within any industry there may be ten or a hundred dif- 
ferent costs of production. Some establishments barely 
manage to pay expenses. Others make large profits for 
selling at the same price that the first establishments 
receive. 

(2) Premiums of this kind put no obstacle in the way of 

1 Premiums on production must not be confounded with export premiums 
such as are employed by several nations (Germany, Austria, and France) in 
the case of sugar, and which produce the strange result that sugar is sold 
cheaper abroad by these countries than at home. It is likely that these 
premiums on exported sugar will be abolished very soon, in accordance with 
an international agreement made in 1902. 



MODERATE FORMS OP PROTECTION 351 

foreign commerce ; they permit the development of exporta- 
tion and importation and do not raise the price of goods, 
whereas customs duties involve an expensive administration 
and give rise to the systematic, demoralizing practice of 
smuggling. 

(3) They are least likely to provoke international con- 
flicts. 

(4) They by no means hinder production, since they do 
not increase the price of raw materials, and are thus not open 
to the objection of artificially raising the cost of production. 
On the contrary, they may be instituted under conditions 
that will stimulate the progress of particular industries. 

(5) Finally, and above all, this system does not purport to 
be anything else than what it really is, namely, a sacrifice im- 
posed upon the nation for reasons of public utility. It gives 
rise to no misconceptions, and sanctions no misrepresenta- 
tions. The public knows that it is paying for this " protec- 
tion," and knows exactly how much it pays. Herein consists 
the great economic and moral superiority of this method. 
Customs duties, on the other hand, give rise among the 
people to a dangerous misunderstanding by leading them to 
regard as a gain that which in reality is a burden. 

But this last characteristic explains why protectionists 
prefer customs duties. Premiums or bounties to producers 
would make the matter too plain. This, moreover, is why 
such a system as we have suggested can never become popu- 
lar. It makes altogether too palpable and evident the fact 
that a sacrifice is required of all citizens and a privilege 
accorded to the few, thus violating the sentiment of equality. 
Its successful application, furthermore, requires a discern- 
ment and an impartiality which can scarcely be hoped for in 
any human government. 1 

1 Other devices have also been employed for the same purposes : — (a) dif- 
ferential charges, by which, for example in Austria, special railroad rates 
are accorded with a view to encouraging the exportation of certain commodi- 
ties ; (b) guaranteed interest on capital invested in some new industry which 



352 PRINCIPLES OF POLITICAL ECONOMY 

Some years ago there began a movement which, without 
advocating either protection or free trade in general, favored 
reciprocity in the matter of customs tariffs. In England this 
is called fair trade, as opposed to free trade. It is often- 
times argued that by the adoption of restrictions upon trade 
nations do each other injury. It is said that free trade 
would be all very well if every nation adopted it ; but as 
long as other nations impose tariffs on our goods, we must 
be prepared to retaliate. Some of those who hold this view 
regard a tariff simply as a diplomatic means of securing 
mutual concessions, " sometimes treating these concessions 
as steps toward a general policy of tariff reduction the world 
over, which was the plan pursued by the ministers of Napo- 
leon III; sometimes bargaining for them as special privileges 
not to be granted to the world in general, which is the idea 
underlying the present reciprocity treaties of the United 
States. 

" When this view is accepted, a policy of tariff warfare 
follows as a matter of course. There are times when it 
seems as though a great many nations were carried away 
with this spirit of commercial hostility." l When this system 
is employed by way of reprisals to compel a protectionist 
country to reduce its duties, — if, for example, England 
should answer the high tariffs of the United States by 
heavily taxing American products, — it may very well be 
justified. In such a case, however, the question of tariffs is 
political rather than economic. 

But if we regard this conception as a scientific theory, we 
find that it has no logical basis. For if the protectionist 
system is good, it should be adopted; if it is bad, it should 
be abandoned. The question whether other countries have 

it is desirable to encourage (often used in South America and Mexico) ; 
(c) tax exemptions or reductions for new industries which a government 
seeks to acclimatize, — frequent examples of which method are offered by 
Hungary and Rournania. 

1 A. T. Hadley, '•'Economics," p. 444. 



COMMERCIAL TREATIES 353 

adopted it or not has no bearing on the problem ; that is 
their concern, not onrs. No doubt if the states of Europe 
were to levy duties on American products, they would harm 
the United States. But they would also harm themselves; 
and the evil which we are in a position to do our neighbors 
cannot be regarded as a compensation for that which we 
inflict upon ourselves. 

Another form of moderate protection consists of counter- 
vailing duties. Its advocates assert that when a country is 
more heavily burdened by taxation than foreign nations, it 
should, in order to reestablish equality in competition, burden 
foreign products with duties at least equal to the taxes paid 
by native producers. 

We must be careful to understand just what this means. 
If it means simply that those goods which within the country 
are burdened with certain taxes, — like whiskey and tobacco, 
— should be taxed to the same extent when imported from 
abroad, no one will challenge this principle of fiscal equality. 
But if it means that whenever a country has the misfor- 
tune to be oppressed by heavy taxes of all kinds, it can 
lighten this burden by imposing high customs duties on 
foreign goods, it is utterly absurd. Indeed, such an argu- 
ment is entirely based on the notion that customs duties are 
paid by foreign exporters. If, as we have endeavored to 
show, these duties really fall on our own people in the form 
of higher prices, then we may grasp the peculiar nature of 
this plan of compensation, which, under pretence of equal- 
izing the struggle, doubles the burdens of a nation that is 
already most heavily laden. 

• 

X. Commercial Treaties 

Between the system of free trade (meaning laissez faire 
and competition) and that of protection (meaning national 
autonomy and governmental regulation*) there is fortunately 
another commercial policy, namely, that which is founded 
on international agreement and which we may call the con- 



354 PRINCIPLES OF POLITICAL ECONOMY 

tr actual system. It may be regarded as a true outcome of 
the spirit of international amity, and the expression of vol- 
untary solidarity. We have already given utterance to the 
hope that this solidarity will ultimately become the normal 
method of regulating economic relations among individuals 
(see pages 38-40) ; similarly, we hope that it may become the 
customary manner of determining relations among nations. 
Such is in fact the present tendency. Commercial treaties, by 
which nations peacefully and carefully reach some definite 
and permanent agreement with regard to their economic rela- 
tions to one another, seem the wisest policy that an enlight- 
ened nation can adopt. They place reasonable limitations 
upon countries that are disposed to make exaggerated claims. 
They give rise to a reciprocity of interests, and lay the foun- 
dation of friendliness and solidarity among the contracting 
nations. 1 

Commercial treaties offer the following advantages : — 

(1) They guarantee the stability of tariffs during a defi- 
nite period, generally ten years. This circumstance is very 
favorable to the development of commerce. It is of course 
true, on the other hand, that they bind the contracting nations 
and thus deprive them of the privilege of changing their cus- 
toms duties according to varying circumstances ; but this 
immutability should be regarded as a good, not as an evil. 

(2) They permit of a differentiation of duties, according to 
the country with which the treaty is made, whereas customs 
duties otherwise are necessarily uniform and special provision 
cannot be made for differences in the economic conditions 
of various nations. It is true that this advantage is practi- 
cally almost done away with by the so-called " most favored 
nation clause," which is usually inserted in all treaties, and 
by virtue of which any concession made by one nation to 

1 The commercial treaties recently made by Germany, Austria, Switzer- 
land, and Belgium have founded a sort of Central European customs union. 
The United States has tried — thus far without much success — to form a 
customs union that shall include all the American republics. 



COMMERCIAL TREATIES 355 

another is immediately extended ipso facto to all other nations 
having previously made treaties with the contracting nation. 

(3) They lead gradually to a more liberal regime and to 
the abolition or lowering of barriers between nations, because, 
with every renewal of a commercial treaty, the contracting 
parties wrest concessions from each other ; whereas the pro- 
tective system, once firmly established in a country, tends to 
grow more radical and more general, for the reason that all 
classes of the community claim a share of the spoils. 

There can be no doubt that, in many European countries, 
the recent rapid increase in the amount of goods imported 
from America has given rise to a movement in favor of pro- 
tective measures against American products. Particularly 
in Continental Europe this tendency appears to be growing 
stronger, and may culminate in measures that will seriously 
restrict American exportation to those countries. The adop- 
tion of commercial treaties upon the basis of mutual tariff 
concessions, however, will doubtless be found the most suc- 
cessful method of preserving and extending the European 
markets conquered by American goods. 



CHAPTER V — CREDIT 
I. Credit is only an Extension of Exchange 

Credit is protracted exchange, that is to say, exchange 
which is not complete until a certain period of time has 
elapsed. Introduce the element of time into exchange, and it 
becomes credit. Hence credit may be defined as the exchange 
of present wealth for future wealth. 

For example : I sell you some wool, but you have no money 
with which to pay me, i.e. no present wealth to give me in 
exchange for what you have received. This does not pre- 
clude exchange between us. All that you will have to do is 
to give me, in exchange, part of the wealth which you intend 
to create with the wool, — say an equivalent value in cloth 
when you have manufactured it of the wool I gave you. 

In this example the underlying exchange is perfectly obvi- 
ous. The transaction is a sale, differing from ordinary sales 
only in the circumstance that payment is not made immedi- 
ately but at some future date. Now this difference, which 
appears to have little significance, has very important conse- 
quences. It is, indeed, no small matter to introduce the 
element of futurity into the domain of contracts. 

There is another kind of transaction in which the under- 
lying fact of exchange is less perceptible, Suppose that, 
instead of selling you the wool, I lend it to you ; that is to say, 
its transfer is conditioned upon the return of some equiva- 
lent when you have used the wool to make cloth. Evidently, 
you will not return to me the same wool that I lent you, for 
you have employed it to make the cloth. You can, however, 
give me an equal value when you have sold the cloth. 
Here again, although there has really been no sale on my 

356 



CREDIT IS PROTRACTED EXCHANGE 357 

part, it is obvious that present goods have been exchanged 
for future goods. 

The operations just described — sale on condition of pay- 
ment at some future date, and loan — are the two essential 
forms of credit. 

Other things being equal, present goods are always more 
desirable than future goods. Goods for which we must wait 
have less value than those already in our possession. When, 
therefore, present wealth is exchanged for future wealth, the 
equilibrium of exchange must be established by requiring 
the borrower to give back a somewhat higher value. When 
payment is deferred the price of goods is likely to be higher 
than when cash is paid; the difference- between the two prices 
is commonly called discount. Wholesale business houses 
generally give discounts for the immediate payment of bills, 
or for their payment in shorter periods than are customarily 
allowed. The same principle explains why in the case of 
loans the sum returned is always somewhat larger than the 
sum loaned, the difference being called interest. 1 

Credit involves the following characteristics : — (1) The 
consumption of the object sold or loaned ; (2) the expecta- 
tion of some new object of value to take its place. The man 
who lets a house or a farm knows perfectly well that the 
house or farm remains the same whether he or a tenant occu- 
pies it, and that it will ultimately be restored to him. But 
the man who yields an object designed for consumption 
knows that he loses all control over the object. He knows 
that it will be destroyed ; that, in fact, is its purpose. Wheat, 
for instance, must be ground, to produce flour ; it must be 
planted, to give a new crop. Even money must be spent or 
invested in some way before it can produce additional money. 

The destruction of wealth, it should be noted, for the 

1 Consult Boehm-Bawerk, "Capital and Interest." In this section we 
have nothing to do with the question whether discount and interest are legit- 
imate, nor with the question whether they can be done away with. These 
questions come under Distribution. 



358 PRINCIPLES OF POLITICAL ECONOMY 

purpose of creating future wealth, is always a problematical 
operation for both lender and borrower. 

Consider first the lender. He always incurs more or less 
risk. To be sure, he expects to receive more than an equiva- 
lent amount of future wealth. But this anticipated wealth does 
not yet exist ; before he can receive it, it has to be produced, 
and whatever is future is ipso facto uncertain. For this 
reason legislators have sought to devise means for protecting 
the lender against loss ; and the devices and precautions 
which they have introduced from time to time constitute 
one of the most important branches of civil law : guaranty, 
liability, mortgages, etc. Notwithstanding legal protection, 
the lender always must have more or less confidence in the 
borrower. This is why the term " credit " is applied to this 
particular kind of loan. Credit, as the word itself indicates 
(credo, I believe), means faith. 

Consider now the borrower. Unlike the tenant of a house 
or a farm, the borrower is not bound to preserve intact the 
object lent to him, and to return it to the owner at the 
expiration of a fixed period. In using it, that is to say in 
destroying it, he must create an equivalent value with which 
he can meet his debt when it is due. He must therefore be 
extremely careful to employ this wealth productively. If he 
consumes it unproductively (e.g. for personal expenses), or 
even if he fails to reproduce an amount of wealth at least 
equal in value to that which he borrowed, he suffers a loss. 
A list of the unfortunate borrowers of all nations and of 
all epochs, whose ruin was due largely to the misuse of 
credit, would be interminable. Credit, therefore, is an infi- 
nitely more dangerous productive device than those we have 
heretofore considered. It is likely to render efficient service, 
in production, only in communities which have reached a high 
stage of industrial education and development. 



THE INVENTION OF NEGOTIABLE PAPER 359 

II. The History of Credit 

Of all systems of economic organization, that based on 
credit is the most recent. In fact, its function is too complex 
to permit of its introduction among primitive peoples. At 
present it presupposes the accumulation of capital in the 
form of money, although among primitive peoples credit 
appears to have existed in the custom of lending cattle. It 
may, indeed, be held that loans played an important part in 
Antiquity and in the Middle Ages. This is true. But loans 
were then regarded simply as a kind of assistance given by 
members of the same family or of the same social class to 
each other in cases of exceptional need, or as a method of 
exploiting foreigners and members of other social classes. 1 
Credit was rarely employed as a method of encouraging pro- 
duction. Hence the opprobrium which attached to the loan 
of money or goods, and the riots which were frequently 
caused by debts of this nature. In the loan contracts of the 
Middle Ages the church fathers endeavored to distinguish 
those cases in which loans aided production (and for which 
they admitted that interest was legitimate) from those in 
which it was clearly unproductive (in which cases they called 
interest usury and forbade it) . They did not reason so poorly 
as some critics have supposed, inasmuch as the measures 
that they adopted were dictated by the needs of the epoch. 

As a means of facilitating production, credit arose only 
when it became possible to regard future wealth, — which is 
the true object of credit, — as commercially transferable from 
one person to another. This important step was accomplished 
by the invention oi negotiable paper, — credit instruments that 
may be bought and sold in the market in much the same way 
that other goods are. The use of negotiable paper dates 
probably from the thirteenth century. 2 

1 "Unto a stranger thou mayest lend upon usury ; but unto thy brother 
thou shalt not lend upon usury" (Deuteronomy xxiii. 20). 

2 Professor Hildebrand, one of the founders of the German historical 
school of economists, made credit the basis of his division of economic evolu- 



360 PRINCIPLES OF POLITICAL ECONOMY 

At the outset, credit instruments were not regarded as 
wealth, because they were neither consumable nor at all like 
material objects. A credit instrument was considered as a 
purely personal bond between creditor and debtor. In the 
significant words of the commentators on classical Roman law, 
the obligation adhered to the body or person of the debtor, — 
ossibus liaeret. If the debtor failed to repay, the creditor 
could not seize his goods ; there was nothing which he could 
seize but the person of the debtor. Roman law permitted 
the creditor to imprison the debtor or even to cut him in 
pieces, — as the law of the Twelve Tables puts it, in partes 
secanto. Under such circumstances as these, the conception 
of transferable credit claims could not arise. 

But it was not long before Roman jurists took a great step 
forward ; credits or claims came to be regarded as wealth 
(bona*), and by means of ingenious devices they were even 
made transferable (e.g. by what was called novatio and litis- 
contestation. 1 The transfer of credits, however, continued to 

tion. The first period was that of natural economy, in which there was no 
exchange or in which exchange took the form of barter ; the goods that were 
produced were consumed by the producers, and there was little or no change 
in the ownership of wealth. The second was that of money economy, marked 
by the introduction of sale and purchase. Exchange, which played an 
important part in the economic life of the community, was facilitated by the 
use of money. The third period is that of credit economy, characterized by 
the custom of deferred payment, by loans, and by other forms of protracted 
exchange transactions. 

This threefold division of economic evolution into JSTaturwirthschaft, Geld 
wirtJischaft, and Creditwirthschaft must not be supposed to imply that at any 
time one of these systems prevailed alone. It is probable that barter will 
never entirely disappear ; indeed, we have shown that in many respects we 
have returned to what is practically a system of barter, e.g. in international 
trade. Credit, on the other hand, existed in an embryonic form among prim- 
itive tribes, where the custom prevailed of lending food or cattle. The above 
division, however, is true in the sense that certain periods have been charac- 
terized by the predominance of one system. 

Credit economy is only in its beginnings. There may come a time when it 
will do away entirely with money. (See page 290.) 

1 Credit has likewise undergone another transformation which we can 
only indicate here because it belongs to the domain of law rather than that 



TRANSFERABLE CREDIT CLAIMS 361 

be more difficult than the transfer of ordinary material goods, 
and even to-day, according to the French Civil Code (which 
may be regarded as the heir and outcome of the Roman legal 
system), the transfer of credit instruments involves formal- 
ities of a somewhat complicated nature, — especially the 
notification of the debtor. 

But business law has always progressed more rapidly than 
civil law and served as a pioneer of legal evolution. Thus, 
in the Middle Ages, business law — the "law merchant" — 
devised admirable means of representing credit claims by 
certificates, transferable simply by indorsement. The most 
important kinds of negotiable credit instruments (" commer- 
cial paper") are bills of exchange and promissory notes, 1 

of economics. It has lost the character of an exclusively personal matter, 
which it possessed at the outset, and become real, that is to say, it is now 
based upon some material security or lien, or at least upon the property 
of the debtor. 

Nevertheless, there appears here to be another example of that strange 
spiral evolution of which we have already mentioned several examples (page 
287, note), inasmuch as the tendency now is to revert to personal credit, i.e. 
credit based solely on faith, — which is the true and highest significance of 
the term. Examples of this are "lines of credit," cooperative credit socie- 
ties, etc. 

1 In the case of a bill of exchange the creditor who has sold goods makes 
out a paper to this effect : — 

New York, March 1, 1903. 

To William Wilson [the debtor], Chicago, Illinois. 

At sight of this bill, pay to John Jones, or order, One Hundred Dollars, 
for value received. 

(Signed) Henry Brown [the creditor]. 

Brown will sell this bill to Jones, who, if he chooses, may transfer it to 
any one else by indorsing it. 

The following is the form of a promissory note, made out by a purchaser 
of goods, or a borrower, to his creditor : — 

Philadelphia, March 1, 1903. 

Three months after date I promise to pay, to Henry White [the creditor], 
or order, the sum of Five Hundred Dollars, with interest at five per cent, 
for value received. 

(Signed) Philip Johnson [the debtor]. 



362 PRINCIPLES OF POLITICAL ECONOMY 

Promissory notes are written promises to pay a sum of 
money upon demand or at some specified time. These notes 
may be transferred at will from one person to another, and 
circulate almost as freely as money. The payee or holder of 
the note may, by writing an order on the back and signing 
his name, make the note payable to a third person. By 
indorsing the note in this manner, any holder may use it as 
a means of paying his debts. When the final holder presents 
it for payment, it may have effected a number of exchanges. 

Transferability by indorsement is a marvellous simplifica- 
tion ; but indorsement is nevertheless a formality, and one 
of no mean importance, since it involves the legal responsi- 
bility of all those who sign the paper. Greater simplicity 
and wider use is attained by suppressing the need for a sig- 
nature, and creating credit instruments that may be passed 
from hand to hand as easily as money (e.g. notes payable to 
the bearer'). 

With the accomplishment of this step we reach the latest 
stage in the evolution of credit. Henceforward vast amounts 
of wealth — not fictitious wealth, but future wealth, which 
is something quite different — are added to the sum total of 
present wealth, and circulate in the form of negotiable paper, 
or of paper payable to the bearer. These credit instruments 
of various kinds are now used to an extent that but a few 
years ago would have been almost inconceivable, and have 
given rise to a class of persons called bankers, whose business 
it is to deal in these instruments. 

An investigation made some years ago by the Comptroller 
of the Currency, concerning the use of various kinds of 
money and the use of checks, drafts, and other credit in- 
struments in the national banks of the United States, dis- 

A promissory note is simply a promise to pay made by a debtor to his 
creditor, but which the latter can transfer to other persons. A bill of ex- 
change (also called a draft) is somewhat more complicated ; it is an order 
addressed by the creditor to his debtor instructing him to pay a certain sum 
to some third person, designated in the bill, or his order. 



THE ADVANTAGE OF NEGOTIABLE PAPER 363 

closed that less than 10 per cent of the receipts (in 1892) 
were in cash ; in the larger cities, such as New York, metallic 
money represented only 2 or 3 per cent of the bank receipts. 

But, it may be asked, what great advantage is there in 
representing credit by negotiable paper ? 

Although it is exceedingly desirable for a borrower or a 
person that buys on credit to have some capital at his dis- 
posal during a given period, it is not always convenient for 
the lender or the seller to be obliged, during the same period, 
to do without the money that is due him. A manufacturer 
daily finds it necessary to make purchases and to pay wages ; 
his business cannot continue unless his supply of capital is 
replenished from day to day by the sale of his manufactures. 
Suppose, however, that his manufactures are sold on credit, 
i.e. not for immediate, but for future, payment; in this event 
it would seem impossible for him to continue his business. 

What, in this case, shall he do ? It would appear that the 
same capital cannot be at the disposal of two persons at the 
same time, — at the disposal of the lender as well as the bor- 
rower. Yet this apparent impossibility is accomplished by 
means of negotiable paper. In exchange for the capital 
which really belongs to him, but which he has for a time 
relinquished, the lender, or the dealer who sells on credit, 
receives an acknowledgment in the form of a bill of ex- 
change or a promissory note or some other negotiable or 
transferable paper ; this paper represents a value which, like 
all other values, can be bought and sold. Should the lender 
want his money, nothing is more simple than to get it ; all 
he has to do is to sell this paper, i.e. in the language of 
bankers, negotiate it. 1 

III. Can Credit create Capital? 

Credit has acquired such importance in modern society 
that we are tempted to ascribe miraculous powers to it. 

1 The expression buying and selling exchange is used frequently, and has 
reference to dealings in bills of exchange. 



364 PRINCIPLES OF POLITICAL ECONOMY 

Speaking constantly of great fortunes founded on credit, 
and recognizing that the most extensive enterprises of mod- 
ern industrial life are built upon a basis of credit, we are 
easily persuaded that credit is a factor of production, and 
that it can create wealth quite as well as land or labor. 

But this is an illusion. Credit is not a factor or agent of 
production. It is a particular method of production, — which 
is quite a different matter, — just like exchange and the divi- 
sion of labor. It consists, as we have said, of the transfer of 
wealth or capital from one person to another. But to trans- 
fer is not to create. Credit can no more create wealth than 
exchange can create commodities. As John Stuart Mill has 
neatly put it, " Credit is simply permission to use the capital 
of others." 

What gives rise to the misconception which we are now 
discussing is the existence of credit instruments. We have 
seen that loaned capital is represented by an equal value of 
negotiable paper held by the lender. Hence it appears as 
though the act of lending doubles the amount of capital. 
The sum of $ 1000 which I have lent you, and your note for 
$1000 which I now have in my possession in place of the 
money, — do not these two make a total of $2000 ? 

From the subjective or individual point of view the note 
is, in fact, capital ; it is capital for me, but not for the nation 
as a whole. For it is evident that I cannot negotiate the 
paper until some one will give me money or goods in ex- 
change for it. The note is therefore not capital per se, but 
simply affords me the possibility of obtaining other capital in 
lieu of that which I have relinquished. It is obvious, more- 
over, that whatever may be the use to which I want to devote 
the value represented by the note, — whether I shall use it 
to pay my living expenses or use it for production, — I can 
do this only by converting it into those articles of consump- 
tion or instruments of production which are offered for sale. 
It is not by means of pieces of paper that I shall support 
life or carry on production, but with the aid of whatever 



CREDIT HELPS PRODUCTION 365 

tangible, actual wealth I can procure in exchange for this 
paper. 1 

Although credit cannot be called productive in the strict 
sense of creating capital, it renders eminent services to pro- 
duction 2 by enabling us to use existing capital to the best 
possible advantage. 

1 Mr. Macleod has acquired some distinction as an advocate of the theory 
that credit instruments are real wealth, true capital. He is, it must be ad- 
mitted, logical in his reasoning; for he defines wealth as "everything that 
has exchange value." Credit instruments unquestionably possess exchange 
value, and would therefore fall under the head of wealth. But his defi- 
nition is wrong. If every credit instrument really constituted wealth, it 
would be possible to double the wealth of any community by simply having 
each citizen lend his estate to his neighbor in exchange for a note. 

Mr. Macleod maintains that these instruments at least represent future 
wealth. This is true, and exactly what we have said ; but the very fact that 
they are future wealth makes it illegitimate to count them as existing wealth. 
When they have become present wealth, they will be counted. Until then 
there will always be this important difference between present and future 
wealth : the former exists, whereas the latter does not exist. Men live and 
produce by means of present wealth, not by means of anticipated wealth. 
To reckon future wealth as part of a nation's riches would be like taking a 
census by adding to the present population those persons who will be born 
twenty years hence, — on the ground that they are future members of the 
community. 

Professor Leroy-Beaulieu remarks that Macleod' s theory is like maintain- 
ing that whenever a person is reflected in a mirror, there are two persons 
instead of one. 

2 We speak advisedly of its services to "production," because credit for 
consumption ordinarily has disastrous consequences. Credit for consumption, 
however, may be admitted as rendering some services, such as : (a) helping 
us to tide over difficult situations while awaiting a turn of fortune ; (6) sim- 
plifying accounts and avoiding very frequent payments (for example, the 
daily purchase of bread " on credit " at the baker's). 

Professor Leroy-Beaulieu, in his interesting discussion of credit (Vol. Ill, 
page 374, " Economie politique "), points out these three advantages : — 

(1) The transfer of capital effected by credit ordinarily results in a better 
use of this capital by the borrower (and by society) than would have been 
made by the lender. 

(2) By placing capital in the hands of those persons who are able to make 
a better use of it than those who accumulate it by saving, credit enables the 
former to give the latter, in return for the relinquishment of their funds, a 
share in the results of this better use of capital. Thus credit makes saving 
more advantageous and contributes to the growth of capital. 



366 PRINCIPLES OF POLITICAL ECONOMY 

If capital could not be transferred from one person to 
another, and if everybody were reduced to the necessity of 
employing his own capital, and only his own capital, an enor- 
mous amount of wealth would remain unused. In all civil- 
ized societies there are many persons who cannot make use 
of their own capital, or, at least, cannot make the most 
profitable use of it. Among these persons are the follow- 
ing:— 

(cl) Those who have too much capital. As soon as a man's 
fortune exceeds a certain sum, it is no easy matter for him 
to make the best use of it by his own ability alone ; usually, 
moreover, the possessor of a very large amount of capital is 
little disposed to take the necessary pains to make the most 
productive use of it. 

(6) Those who have not enough. Laborers, farmers, and 
servants, who have saved small sums of money, would be at 
a loss how to employ these small savings productively. But 
when these savings are united they amount to millions, and 
permit of carrying on vast productive enterprises. 

(<?) Those who, by reason of their age, sex, or occupation, 
cannot themselves employ their capital in industrial enter- 
prises. This is the case with minors, women, and persons 
who are engaged in the liberal professions, — lawyers, physi- 
cians, military men, clergymen, and government officials. 

On the other hand there are people in the world — such as 
" captains of industry," inventors, agriculturists, even work- 
men — who could make excellent use of capital if they pos- 
sessed it; unfortunately, they are sometimes entirely without 
it, or have but an insufficient quantity. 

Now if, by means of credit, capital is transferred from 
those who can not or will not make the best use of it, to 
those who are capable of employing it productively, this is 

(3) By substituting simpler methods of payment, and using more effective 
and cheaper kinds of capital than money, credit permits of transacting a 
vaster bulk of business with much less money. As money is a costly instru- 
ment of exchange, the economy of money permits a nation to increase its 
productive capital. 



THE BANKING BUSINESS 367 

of great benefit for all persons concerned, and for the whole 
community. In every country there are millions of dollars 
which in this manner are withdrawn from mere sterile hoard- 
ing, or from unproductive consumption, and made productive 
by means of credit. It has been well said that credit trans- 
forms latent capital into active capital. 1 

In the following sections we shall consider the organiza- 
tion of credit, i.e. the institutions and arrangements by 
means of which credit is utilized. 

IV. The Function of Banks 

We have remarked that the exchange of commodities is 
almost impossible without the aid of certain intermediaries, 
called merchants or traders. In the same way, trade in 
credit would be next to impossible without the assistance of 
intermediaries called bankers. 2 ' 

Bankers are like all other merchants. Ordinary mer- 
chants buy and sell goods ; bankers deal in capital repre- 
sented either by credit instruments or by money. The 
former buy in order to sell, and find their gain in buying as 
cheaply as possible and selling as dearly as possible. The 
latter borrow in order to lend, and find their gain in borrow- 
ing at as low a rate as possible and lending at as high a rate 
as possible. Borrowing and lending are the two funda- 
mental transactions of all banking business. The sums 
which the banks borrow are usually obtained through 
deposits, and their loans are usually made in the form of 

1 It may be said that credit performs the same part, with regard to capital, 
as that performed, with regard to wealth, by exchange. We have noted that 
exchange, by transferring wealth from one owner to another, does not create 
wealth, but makes it possible to utilize it better, and to make better use of 
productive labor. 

Credit likewise permits the economy of a certain amount of metallic 
money. But we have already considered this function of credit, and we shall 
again speak of it in connection with bank notes. 

2 A bank has been tersely defined as " a manufactory of credit and a 
machine of exchange." 



368 PRINCIPLES OF POLITICAL ECONOMY 

discount; they are, therefore, commonly called banks of de- 
posit and discount. 1 

There is, however, a third transaction quite different from 
the other two, although fundamentally it constitutes a 
species of loan. We refer to the issuing of notes. This 
operation is not essential to banks ; often it is an excep- 
tional, privileged function, belonging only to certain banks 
known as banks of issue.' 1 

Let us examine, in turn, each of these branches of the 
banking business. 

V. Deposits 

The banker's first task is to get capital from others. He 
can, of course, use his own capital or those larger sums which 

1 The history of banks is closely connected with the history of commerce 
since the Middle Ages. The creation of each great bank marks a new stage of 
commercial development. The first were those of the Italian cities, Venice 
(1400 ?) and Genoa (1407). Then commercial supremacy passed to Holland, 
and we come to the great and celebrated Bank of Amsterdam (1609), soon 
followed by those of Hamburg and Rotterdam. Finally, the creation of the 
Bank of England, in 1694, indicated that this nation was about to take the 
lead in commerce. The Bank of France was not founded until the beginning 
of the nineteenth century, although Law had founded a bank in 1716. 

2 Originally, bankers were simply money-changers. In London, during 
the seventeenth century, the goldsmiths took charge of money-changing. 
But whereas money-changers to-day have little to do except in frontier cities 
or great commercial centres, i.e. in such places as are frequented by foreign- 
ers, this was not the case in the Middle Ages. The innumerable kinds of 
money resulting from the right of feudal lords in some countries to coin it, 
and the frequency of clandestine debasement or counterfeiting (not infre- 
quently due to the sovereign himself), made the business of these changers, 
who, for a premium, would furnish good money, a very important one. 

In Holland, where international trade accumulated money from all coun- 
tries, merchants found it advantageous to deposit their money at the Bank of 
Amsterdam, which guaranteed them the same weight of silver, i.e. the same 
value, as that deposited. Accounts were kept in an ideal money called bank 
money. For these reasons a claim of the bank was always worth 8 or 10 
per cent more than the same sum in current money. (See Adam Smith's 
celebrated Chapter 3, Book IV, on this subject.) 

The first banks did not lend money ; they were banks of deposit, but not 
banks of discount. In 1658, however, the Bank of Sweden issued notes pay- 
able on demand. 



HOW DOES THE BANKER GET MONEY? 369 

may be furnished by the association of capital, and which, 
in modern society, amount to hundreds of millions. But if 
the banker carries on his business only with his own private 
capital, or with that of a group of capitalists, his profits will 
be small and his services of little importance to society. We 
shall soon see the reason for this. The banker, therefore, 
must carry on his business with the money of the public, and 
for this reason is obliged to borrow it from the public. 1 

How does the banker borrow this money from the public ? 
Not after the fashion of governments or municipalities or 
business establishments, which (in the guise of stock, bonds, 
debentures, shares) borrow for long periods the capital that 
is offered for investment. Such loans as these involve the 
payment of too high a rate of interest. What the banker 
tries to get hold of is the circulating, floating capital which, 
in the form of money, people carry about in their pockets or 
keep in their safes. In all countries there is a large amount 
of capital of this sort, — capital that is not fixed, which does 
nothing, which produces nothing, and which is simply kept 
in readiness for the time when it shall be employed. The 
banker says to the public : " Intrust your idle funds to me 
until you have found some employment for them. I will 
spare you the trouble of taking care of them and will return 
them as soon as you shall have need of them, at your first 
requisition. To do this is to render you a service. I will, 
moreover, pay a low rate of interest for your money, — say 
2 or 3 per cent. 2 This, at all events, is more than it 

1 Some large banks never employ their own capital in their transactions; 
they invest it either in real estate or in stocks and bonds, which constitute a 
reserve or a guarantee for their patrons. This, for instance, is true of the 
Bank of France. 

Almost all of the capital of the Bank of England consists of government 
debts. 

2 Banks that receive money on deposit often pay no interest at all for 
deposits, on the assumption that they render a sufficient service by storing 
the money safely. Such is the case for the Bank of England and the Bank 
of France, which, nevertheless, receive vast sums on deposit. Formerly, 
banks of deposit, such as those old banks which we have mentioned, required 



370 PRINCIPLES OF POLITICAL ECONOMY 

produces for you while in your own possession. I will, 
finally, render you the additional service of being your 
treasurer, collecting your income, cashing your coupons, and 
paying your creditors in accordance with your instructions, 
— all of which will save you considerable inconvenience." 

Wherever these offers are heard and accepted by the 
public, bankers may thus obtain a large amount of capital on 
very easy terms by draining from circulation the coin which is 
scattered about the country. We have already observed that 
in England, for instance, it is customary for wealthy people 
not to keep any money in their homes, but to deposit it all 
with their bankers. The same is true to some extent in this 
country. Whenever a person has to pay a merchant or any 
other creditor, the latter is simply sent to the bank to receive 
payment upon presenting a check or written order which the 
debtor has detached from his check-book. This method of 
payment is now becoming universal. 

VI. Discount 

When this floating capital has been borrowed by the bank 
at a low rate, the next step is to turn it to account by lending 
it to the public. 

How shall this be done ? The banker cannot lend the 
money for long periods ; it would be a mistake to purchase 
mortgages or to launch industrial enterprises. He must bear 
in mind that he holds this capital only as a trust, that is to 
say, on deposit ; he may be obliged to refund it at a moment's 
notice. Consequently he can lend it only for short periods 
and employ it for short-time transactions that deprive him 

depositors to pay for the keeping of money, because they did not touch the 
funds in their keeping and hence made no profit on deposits. 

But to-day all banks try to employ productively the money in their charge. 
Hence most of them grant a low rate of interest in order to attract deposits. 
They sometimes give a higher rate of interest when the depositor binds 
himself not to withdraw his money except after giving notice to that effect 
six months or a year or five years in advance. 



THE NATURE OF DISCOUNTING 371 

of its control for only a little while. The deposits must be 
kept, so to speak, within easy reach. 

Are there any loan transactions which fulfil these condi- 
tions ? 

There is one variety of transaction which complies with 
them admirably. When a merchant has sold goods on credit, 
as is customary in modern business, and happens to require 
money before the time for payment is reached, he turns to 
the banker. The latter will advance the sum that is due for 
the goods sold, minus a small amount which constitutes the 
banker's profit ; thus the banker acquires the merchant's 
claim on his purchaser, i.e. his bill of exchange or the promis- 
sory note obtained from his debtor. The banker keeps this 
bill or note until the time when it falls due, whereupon he 
collects it of the debtor. In this manner the banker recovers 
the money which has been advanced. 

This transaction is called discounting. It is a form of loan. 
For it is obvious that the banker who, in exchange for a bill 
of exchange for $1000, payable in three months, advances 
$985 to the merchant, and collects $1000 when the bill is 
due, has in reality lent money for a period of three months 
or less at the rate of 6 per cent or more. These loans are 
always for short periods. Bills of exchange negotiated by 
bankers are not only usually payable in three months at the 
outside, but it is generally not necessary to wait even that 
long before their collection. In the Bank of France, for 
instance, bills of exchange are kept, on the average, 
twenty-seven days before being collected. It is therefore 
only for a very short period that the banker loses possession 
of the money he has received on deposit, inasmuch as every 
dollar returns to the bank within a few weeks. 

Hence it is apparent that so long as the demands for the 
return of deposits are scattered over a period of four weeks, 
the banker, thanks to the periodic return of the money 
advanced to borrowers, will always be able to meet all the 
demands that may be made upon him. It is improbable that 



372 PRINCIPLES OF POLITICAL ECONOMY 

the requests to refund deposits will be as frequent as this, at 
least under ordinary circumstances. It would therefore be 
difficult to find loan transactions better adapted to the needs 
of banks of deposit. 

Nevertheless, it is evident that in periods of crisis the 
banker must incur considerable risk. If all the depositors 
should hurry to the bank on one and the same day and claim 
their money, the bank would surely be unable to meet their 
demands, because its money, or rather their money, is being 
used outside in the business world. It will of course soon 
be returned, but there is always this difference between the 
money borrowed by the bank and the money lent by it: the 
former is payable on demand, whereas the latter usually can 
be claimed only after a certain period has elapsed; 1 and there 
are times when this difference may lead to bankruptcy. 

But is this problematical danger a sufficient reason for not 
permitting banks to make use of their deposits, and for 
obliging them to keep intact the money that is intrusted to 
them, after the manner of the old banks of Venice and 
Amsterdam ? Certainly not. For if that were done, all par- 
ties concerned would be greatly inconvenienced and highly 
dissatisfied. 

First, the depositors themselves would object ; for it is 
clear that, if the bank is compelled to keep their money in 
its vaults without employing it, the bank could not possibly 
pay interest on deposits, but, on the contrary, would be com- 
pelled to require payment to cover the cost of keeping. 
Hence it is better for the depositors to run the risk of having 

1 In large commercial centres bankers frequently lend considerable sums 
on condition that they be returned on demand. The reserve of a bank con- 
sists of two elements : one representing the cash needed in the everyday 
transactions of its customers, and the other an amount retained as a means 
of safety and used to meet unforeseeable and irregular demands. This latter 
fund cannot be safely invested even in bills, unless it is very large, and the 
business of the bank's customers is of an unusually certain character. It is 
therefore put out on what are known as "call loans." (See W. A. Scott, 
"Money and Banking," New York, 1903.) 



THE BANK RESERVE 373 

to wait a few days for reimbursement, than to hoard their 
money at home unproductively, or to be obliged to pay for 
its safe-keeping. 

Society, too, would object ; for the social utility of banks 
consists in combining scattered and unproductive capital 
(existing in the form of coin) and making it active and pro- 
ductive. This function evidently is impossible the moment 
that banks are unable to employ deposits. 

Hence banks do not hesitate to make use of the sums con- 
fided to their charge. But in order to face any demands 
which may arise, they take care always to have a certain cash 
reserve on hand. It is impossible to establish a priori the 
ratio of deposits to the cash reserve, but it has been found 
by long experience that a reserve of from 15 to 25 per cent 
of the deposit is sufficient to meet all demands which 
depositors are likely to make at one time. (See the section 
on the Organization of Banks.) A bank's reserve should be 
larger whenever its credit is poor or whenever it has many 
large depositors ; it should strengthen its reserve particu- 
larly during commercial crises and on the advent of new 
issues of government bonds, — that is to say, at such times 
when it can foresee that many depositors will be likely 
to want their money. 

It must not be supposed, however, that all the bank 
deposits are in cash. The term deposits is applied indif- 
ferently to credit balances originating in deposits of money 
or to those having their origin in the discounting of notes, 
and may, therefore, be defined as the aggregate amounts 
standing to the credit of customers on the bank's books. 
When, for example, a business man wants a note dis- 
counted, he is, theoretically, entitled to receive cash at 
once. But if he asked for cash at once in full, the bank 
would not be likely to discount notes for him in the future. 
Usually, the business man does not require cash. What 
he wants is a certain amount of purchasing power in avail- 
able form. The proceeds of the discounted note are simply 



374 PRINCIPLES OF POLITICAL ECONOMY 

placed to his credit to be drawn out by him at such times 
and in such amounts as convenience or necessity may dic- 
tate. The sum which he is thus at any time entitled to 
draw, so long as it stands to his credit, is said to be de- 
posited in the bank. But the bank is reasonably sure that 
the total amounts drawn in a single day upon such accounts 
as these will form but a small fraction of its whole 
deposits. 1 • 

Discounting is not the sole manner in which banks may 
employ their funds. They also lend money in these ways : — 

(a) By making advances on securities. When this is done, 
bankers are careful that the sum lent is sufficiently lower 
than the value of the security. 

(5) By granting an open credit to their customers, who are 
thus entitled to withdraw more money than they have depos- 
ited. Obviously, this amounts to the same thing as lending 
them money. But as such loans — called uncovered loans or 
overdrafts — are exceedingly risky and are made practically 
without security, many banks refuse to transact them. 2 

1 See C. F. Dunbar, " The Theory and History of Banking," and W. A. 
Scott, "Money and Banking." Claims to deposits and national bank 
notes are usually designated as "bank currency" and constitute the 
greater part of the total volume of currency. On July 1, 1900, there were 
in circulation over $300,000,000 national bank notes, and the bank deposits 
amounted to over $4,000,000,000. All other forms of currency combined 
amounted to only $1,762,000,000. 

2 A multitude of technical terms are employed in the banking business. 
Some of these deserve brief explanations. 

Promissory notes are sometimes made out for future or fictitious transac- 
tions, and do not have their origin in any business transaction already con- 
cluded. In this case they are called accommodation bills. 

Some banks, especially in Scotland, authorize persons to draw a maximum 
amount of money from the bank within a given time, and returnable within 
a given time, interest to be paid only for the amount actually drawn and the 
time it is kept out. These are loans on personal security, never less than 
two names being required, and are called cash credits. 

Bills of exchange or drafts are sometimes accompanied by bills of lading, 
warehouse receipts, stocks, or bonds, which are specific titles to property, 
the bank having a lien on the property until the bill is paid. These are 



BANK NOTES 375 



VII. The Issue of Bank Notes 

The interest of a banker, like that of every other business 
man, is to increase the extent of his transactions so far as 
possible. Twice as much business means twice as much 
profit. But how can a banker extend the scope of his trans- 
actions ? 

If it were possible for him really to create capital, in the 
form of coin, instead of being obliged to wait patiently until 
the public is willing to bring it to him, this would manifestly 
be an exceedingly desirable achievement so far as he is con- 
cerned. And bankers have indeed conceived the ingenious 
idea of actually creating the capital they need, by issuing 
simple promises to pay, i.e. by issuing bank notes ; and ex- 
perience has demonstrated that the process is perfectly prac- 
ticable. 1 It has succeeded admirably. 

exceptionally secure bills and command a lower rate of interest than is 
usually paid. 

Letters of credit are instruments of writing issued by a bank, authorizing 
the holder to draw upon the issuing bank or upon some affiliated institution, 
at sight or otherwise, and within a definite period, a sum or sums of money 
not exceeding a specified aggregate amount. The letter always indicates how 
much has been drawn, and how much credit remains unexhausted. It also 
bears the names of the banks or persons in various parts of the world who 
will honor any requests made by the owner — up to the total amount of the 
letter. A large part of the foreign purchases made by merchants is effected 
through bills of exchange drawn under letters of credit. These letters are 
also much used by tourists to pay their travelling expenses. (See Horace 
White, "Money and Banking.") 

1 The invention of bank notes is attributed to Palmstruch, the founder of 
the Bank of Stockholm (1656). 

The early bankers of Italy and Amsterdam, and the London goldsmiths, 
issued notes in the seventeenth century ; but these notes represented simply 
the money which they had in their vaults, —they were merely receipts for 
deposits and not really bank notes. 

As the deposit business of bankers and goldsmiths grew, and the quantity 
of notes called for by depositors increased, it became more convenient to print 
blank forms, to be filled out with the names of the depositors and of the 
amounts due them. Still later notes were printed for round sums, —as, for 
example, five or ten pounds, — which could be handed in quantities to the 



376 PRINCIPLES OF POLITICAL ECONOMY 

In exchange for the negotiable paper which is presented 
for discount, the banks, instead of paying in money, give 
their notes. That the public accepts this arrangement may 
cause some surprise. Here, for example, is a business man 
who comes to the bank to " sell " a bill of exchange for 
$ 1000, and in return for it he receives other credit instru- 
ments, namely, bank-notes for the same sum minus the dis- 
count. " What use is this to me ? " he may inquire. " I 
want money, not instruments of credit ; else I might just as 
well have kept the bill of exchange with which I came." 
But let him reflect a moment. Although the bank note is 
only an instrument of credit, like a bill of exchange or a 
promissory note, yet it represents a far more convenient 
kind of credit claim. It is, in fact, superior to most credit 
papers for these reasons : — 

(1) It is transferable to bearer, just like coin, whereas a bill 
of exchange is subject to the formality and the responsibilities 
of indorsement. 

(2) It is payable at sight, i.e. at any time whatever, whereas 
commercial paper is payable only at a specified date. 

(3) It is always payable on demand, whereas negotiable 
paper may lose its value at the expiration of a certain 
period. 

(4) A bank note is always for a round sum, such as is cus- 
tomary in the prevailing monetary system, — like $10, $20, 
or $100, — whereas commercial paper, being the result of 
commercial transactions, often has a fractional value. 

persons entitled to receive them ; and these were made payable to bearer, or 
to order, according to the wish of the depositor. When the business of dis- 
counting commercial paper was added to the goldsmith's vocation, the notes 
were issued, if desired, to the persons getting the discounts. 

Thus the right to issue such notes became recognized as a right at common 
law. Anybody could issue them and put them in circulation, if people were 
willing to take them. Certain charters granted to banks in Philadelphia and 
New York before the adoption of the federal Constitution contained no men- 
tion of circulating notes, since the right to issue them existed without legis- 
lative authorization. The Bank of New York issued circulating notes seven 
years before it received a charter. (See Horace White, " Money and Bank- 
ing," Boston, 1902.) 



CONVENIENCE OF THE BANK NOTE 377 

(5) It is issued and signed by a well known institution, the 
name of which is familiar to the public, whereas the signers 
of a bill of exchange or a promissory note are often known 
only to the persons that have business relations with them. 1 

(6) Finally, it yields no interest, and is in this respect like 
a coin, whereas all other credit paper yields interest. This 
must not be regarded as a sign of inferiority, — far from it, — 
but as making the bank note more closely similar to money, 
inasmuch as its value always remains the same and is not sub- 
ject to variations according to the proximity or remoteness 
of the day upon which it falls due. 

The above considerations lead the public to accept a bank 
note quite as readily as metallic money ; bank notes are 
fiduciary paper money. (See page 259.) 

It goes without saying that banks derive great benefit from 
the emission of notes. It provides, them, on the one hand, 
with the resources necessary for extending their transactions, 
— within limits dictated by prudence and which we shall 
examine presently. On the other hand, the capital which 
they obtain by means of notes is far more profitable to them 
than what they receive in the form of deposits. Deposits, as 
we have seen, generally cost the banks 2 or 3 per cent interest, 
whereas bank notes cost merely the expense of manufacture, 
which is insignificant. 

But we must not conceal the fact that although this trans- 
action may give splendid returns to the bankers, it may also 
give rise to serious dangers. The sum total of bank notes in 
circulation, which may at any time be presented for reim- 
bursement in coin, represents a debt that is payable on 
demand, precisely like deposits. The bank, consequently, 
is exposed to a twofold peril : it may be called upon at any 
time to refund its deposits and to cash its notes. 

The necessity of a cash reserve exists even when the bank 

1 The discount of commercial paper by the banks which give their notes 
in return for this paper has been aptly denned as "swapping well known 
credit for less known credit." 



378 PRINCIPLES OF POLITICAL ECONOMY 

• 

has to meet only the demand for its deposits ; it is still more 
imperative when the bank adds the debt resulting from its 
circulation of notes to that which results from its deposits. 
Hence we can understand why the law of several countries 
obliges banks of issue always to keep a certain reserve. 1 

Unfortunately, as the money which lies unused in vaults 
gives no returns, the self-interest of the banks prompts them 
to reduce their reserves to a minimum ; and it is difficult 
for them to resist this temptation. 

VIII. Differences between Bank Notes and Paper Money 

So closely do bank notes and paper money resemble each 
other that the public scarcely understands the distinction. 
Both of them take the place of money. In France and in 
England, bank notes are even legal tender. Yet bank notes 
differ from paper money issued by the government, and are 
superior to it, because of three characteristics : — 

(1) It is a matter of principle that bank notes should 
always be convertible, i.e. payable in specie at the will of the 
holder ; whereas paper money is not. The latter, to be sure, 
has the appearance of a promise to pay a certain sum of 
money, and as a matter of fact the holder may entertain the 
hope that some day the government, when it is better off 
financially, will exchange the paper for coin. Since 1879, 
our own greenbacks have been regarded as convertible, 
although the government would find it impossible to redeem 
them all at once. Yet the question when the government 
will convert its paper money into coin does not greatly concern 
those who receive it, for they have no intention of keeping 
it. (See page 261.) 

(2) Bank notes are issued in the course of commercial 
transactions, and only to the extent required by these trans- 
actions ; whereas the issue of paper money by the gov- 

1 In Germany and in Belgium the law fixes the ratio at one- third of the 
amount of notes in circulation. 



BANK NOTES AND PAPER MONEY 379 

eminent is for the purpose of meeting its expenses, and 
has no other limits than the financial necessities of the 
moment. 

(3) As the name indicates, bank notes are issued by a 
bank, i.e. by a corporation whose principal object is to carry 
on business and whose principal care is to safeguard its 
credit ; whereas paper money is always issued by a govern- 
ment. 

For these reasons bank notes should not be confounded 
with paper money. It may happen, however, that bank 
notes approach very closely to paper money by losing one or 
more of the characteristics mentioned above. 

(A) It is possible, first of all, for bank notes to acquire 
forced circulation, that is to say, to cease, for a time, to be 
convertible in money. This has often happened, during 
crises, to the notes of nearly all the great banks of the 
world. 1 

Even in this case there still remain, as we have seen, two 
other differences between bank notes and paper money, the 
more important of which is this : the quantity issued is 
neither unlimited nor fixed arbitrarily, but is always deter- 
mined by the actual necessities of business. This is an 
excellent guarantee against excessive issues. 

(B) It may happen, however, that bank notes not only 
acquire forced circulation, but that, instead of being put 
into circulation in the course of commercial transactions, 
they are issued merely for making loans to the government 
and enabling it to pay its expenses. 

In such a case, usually, the government which needs money 
says to the bank, "Make a few score million dollars' worth 

1 We must be careful not to confound legal tender with forced circulation. 
A note is legal tender when creditors or merchants cannot refuse to accept it 
in payment for debts or goods. A note has forced circulation when the 
holder cannot convert it, i.e. cannot exchange it at the bank for coin. It 
may happen that bank money is not legal tender, and yet acquires forced 
circulation because creditors are practically obliged to receive it. 



380 PRINCIPLES OF POLITICAL ECONOMY 

of notes, lend them to me, and I will protect you from loss 
by forcing their circulation." 1 

In this event, the second guarantee likewise disappears. 
The issue of notes then has no other limit than the needs 
of the government, and under such circumstances we must 
admit that bank notes are entirely like paper money. 

Yet even in this case the third guarantee still subsists, 
namely, the definite identity of the corporation issuing the 
notes. This of itself is still sufficient to make bank notes 
much less subject to depreciation than paper money. So 
thoroughly has experience proved this, that many govern- 
ments do not now exercise the right to issue money directly, 
but have recourse to the intermediary services of banks. 
The public takes it for granted that banks will oppose the 
issue of excessive quantities of notes, even though the gov- 
ernment should desire it ; for the issue of too large a quan- 
tity of notes may ruin a bank. Hence the public believes, 
— and unfortunately its belief is not without foundation, ■ — 
that a private corporation can and will take care of its own 
interests much better than the government looks after the 
interests of the general public. 

IX. The Rate of Exchange 

The portfolios of all great banking institutions, especially of 
those which transact business with foreign countries, contain 
quantities of bills of exchange payable in various parts of 
the world. These represent goods worth many millions 
of dollars, and constitute the staple of a very active and 
important business. They are designated as "paper on 
London," "paper on Paris," etc., according to the place 
at which they are made payable. 

The bankers who deal in them are obviously nothing but 

1 This is just what took place in France during the Franco-Prussian War 
in 1870. The government repeatedly borrowed from the Bank of France, 
until the total sum reached 1,470,000,000 francs. But in order to do this 
successfully it was first necessary to give the notes forced circulation. 



TRADE IN BILLS OF EXCHANGE 381 

middlemen, commercial intermediaries. Hence we must 
inquire : From whom is this commodity, called commercial 
paper, purchased, and to whom is it sold? 

First of all, Where do they get it? They buy it of 
persons who produce it, of all those who are creditors of 
foreigners, and especially from American merchants or pro- 
ducers who have sold goods abroad, and who, as a result of 
their sales abroad, have drawn bills of exchange on their 
debtors in London, Paris, or Berlin. Should it happen that 
the American creditor needs money before the bill falls due, 
or simply because he finds it inconvenient to send the bill 
abroad for collection, he will sell the bill to his banker ; that 
is to say, he will have his banker discount it. 

To whom do the bankers sell these bills ? To the many 
persons who are in quest of them. Bills of exchange are 
eagerly sought by all those who have payments to make in 
foreign countries, particularly by American merchants or con- 
sumers who have purchased goods abroad. If the American 
purchaser, for instance, cannot induce his English creditor 
to draw a bill of exchange payable in this country, he is 
obliged to send abroad to the home of his creditor the pre- 
cise amount due in pounds, shillings, and pence. To do this 
is exceedingly inconvenient. But if the purchaser can find 
bills of exchange payable at the place where his creditor 
lives, he thus has a more convenient and less expensive 
method of payment. (See page 282.) 

It would appear that this commercial paper should be sold 
("negotiated") for a price that is equal to the sum of money 
which it represents. Thus a bill of exchange for $100 
ought to be worth $100, — no more and no less. Yet this is 
not the case. It goes without saying that the degree of 
confidence which can be placed in the debtor, and the period 
of time which must elapse before the bill is due, affect the 
value of the bill. But aside from these self-evident causes 
of fluctuation, even though the bill is perfectly reliable and 
payable at sight, still its value, like the value of any other 



382 PRINCIPLES OF POLITICAL ECONOMY 

commodity, varies from clay to clay according to changes in 
the demand and the supply. These variations constitute what 
is called the rate of exchange, and are stated in the news- 
papers as regularly as the stock quotations. 

We can readily understand what is meant by demand and 
supply as applied to bills of exchange. Let us suppose that our 
credits abroad, that is to say our claims on foreign countries 
due to exports or other causes, amount to $300,000,000. Let 
us further suppose that our debits abroad, that is to say the 
claims which foreign countries have against us because of 
our imports or other causes, amount to $400,000,000. In 
this case it is certain that there is not enough commercial 
paper for all those who want it, inasmuch as the total supply 
does not exceed $300,000,000, and the demand amounts to 
$400,000,000. Hence all those who require bills of exchange 
to pay their debts bid against each other, and foreign bills 
of exchange rise in value; that is to say, a bill for $1000, 
payable at Berlin or Paris, sells not for $1000 but perhaps 
for $1002 or for $1005. Such paper is, as the term goes, 
above par ; it rises to a premium. 

Conversely, when the claims of the United States against 
foreign countries amount to $400,000,000, whereas the debts 
we owe abroad amount to only $300,000,000, it is certain that 
paper is superabundant, as there is $400,000,000 of it for 
sale, and the payment of our debts requires only $300,000,- 
000. Many bills therefore find no purchasers and can be 
utilized only by sending them abroad for collection. Hence 
bankers strive to dispose of them by selling them at a price 
somewhat lower than their face value. Thus a bill for $1000 
on Paris sells perhaps for $995; i.e. it falls below par. 

Whenever in any country paper payable abroad is quoted 
above par, the rate of exchange is said to be unfavorable to 
that country. What does this expression mean ? Does it 
signify that the rate of exchange is unfavorable to those 
that buy exchange? This may be true; but if the expres- 
sion meant simply this, would it not be necessary to add the 



THE MEANING OF THE RATE OF EXCHANGE 383 

converse statement, that the rate is favorable to those that 
sell exchange ? What the term really means is that under 
these conditions the rate of exchange shows that the claims 
which this country has against foreign countries are not suf- 
ficient to counterbalance our debts to foreign countries, and 
that consequently we are obliged to send a certain quantity of 
money abroad to balance accounts. The rise of the rate of 
exchange, otherwise called dearness of paper payable abroad, 
is an infallible premonitory sign of the exportation of coin, 
for which reason we speak, in this case, of an " unfavorable 
rate of exchange." Conversely, whenever in this country 
foreign paper is quoted below par, we say that the rate of 
exchange is favorable. The process of reasoning is in this 
case precisely similar; a fall in the price of foreign exchange 
indicates that when all reckonings are made the balance of 
accounts will be in our favor and we must therefore expect 
the importation of coin. 

To be sure, we must not attach too much importance to 
the expressions " favorable " and " unfavorable " rates of ex- 
change. We know that for a nation to send money abroad 
or to receive it from other countries constitutes neither a 
great danger nor a great advantage, and that in any case it 
is not likely to last long. (See page 299.) But from the 
banker's point of view this situation is of very great impor- 
tance ; for if money must be sent abroad it will probably be 
taken from the banks. All the premonitory signs, therefore, 
are of capital importance to bankers, who always watch the 
rate of exchange intently, as the sailor who fears a storm 
watches the barometer. (See the section on A Rise in the 
Rate of Discount.) 

We must observe, however, that variations in the price of 
exchange are confined to narrower limits than the price of 
any ordinary commodity. During normal periods (aside 
from the exceptions which we shall point out presently), the 
rate of exchange is not likely to be very much above or very 
much below par. This is due to two causes. 



384 PRINCIPLES OF POLITICAL ECONOMY 

(1) Let us ask, first of all, why does the American busi- 
ness man who owes money abroad seek bills of exchange ? 
Merely because he wants to save the expense of shipping 
coin and converting American money into foreign money. 
But it is obvious that if the premium which he is obliged to 
pay for foreign exchange is higher than the cost of shipping 
and converting coin, there will be no inducement for him to 
buy exchange. The merchant, moreover, who is a creditor 
of foreigners, and the banker who acts as his intermediary, 
seek to negotiate these bills of exchange only to avoid the 
trouble and expense of collecting them abroad and importing 
the coin. Rather than sell these bills at too low a price, the 
merchant or banker will surely adopt the latter method of 
obtaining his money. 1 Inasmuch, therefore, as the trade in 
foreign exchange has no other purpose than to economize the 
cost of shipping and changing money, we can readily under- 
stand that the traffic will cease whenever it becomes more 
expensive for the persons concerned than the direct shipment 
of coin, i.e. whenever the variations in the price of exchange, 
above or below par, exceed the cost of carriage. As the cost 
of carriage, including insurance, is very small, fluctuations in 
the rate of exchange will be confined within rather narrow 
limits. 

(2) But these fluctuations are limited by another influ- 
ence which is both more remote and more subtle, and to 
which we referred when discussing international trade. 
(See page 299.) Let us suppose that the price of foreign 

1 A pound sterling, for instance, is worth $4,866+ in our gold coin, and a 
bill of exchange for a pound is therefore at par when it sells for this amount. 
The price cannot go up beyond about $4.89, which is called the "shipping- 
point." To send $4.86 to London, about 2| cents is charged for brokerage, 
insurance, and freight. Therefore the American debtor who wants to send a 
pound sterling to his creditor in London will not pay more for a paper title 
to a pound sterling than he would have to pay to send this amount abroad. 
When, on the other hand, the price of exchange falls, it cannot go below 
about $4.84 ; for if it does, gold will be imported. Hence $4.84 is called the 
" importing-point." 



EFFECT OF THE RATE ON FOREIGN COMMERCE 385 

bills of exchange rises above par, and that the merchant who 
has drawn a bill for $1000 upon his foreign debtor can sell 
this bill for $1010. It is then evident that this premium of 
$10 is added to the profits of the transaction. Instead 
of making a profit, let us say, of 10 per cent, he gets 11 per 
cent. This increase in the earnings of all those who have 
sold goods abroad will lead a large number of dealers to fol- 
low their example ; in other words, a rise in the rate of 
exchange acts as a premium on exports. 1 

But the increase of exports will give rise to an increase in 
the amount of bills of exchange, and consequently the value 
of these bills, according to the general law of demand and sup- 
ply, will gradually fall until foreign exchange will be at par. 

If, on the other hand, foreign exchange falls below par, it 
is easy to prove by means of the same process of reasoning 
that this fall in value will involve a loss to the merchants 
who have sold goods abroad. Consequently it will tend to 
reduce exports, and thus reduce the supply of foreign ex- 
change until its value has again reached par. 

All this is simply another manifestation of the ordinary 
workings of demand and supply, which tend always to bring 
the value of an object back to the point of equilibrium by 
increasing or curtailing production whenever its value varies 
to any great extent from a normal level. 

We have said that in some exceptional cases the rate of 
exchange may fluctuate greatly, even to an unlimited extent. 
Such cases are the following : — 

1 After the Franco-Prussian War of 1870 French exports increased very 
greatly during several years. Why ? Because the enormous payments 
which the French were required to make to Germany led to a great rise in 
the price of foreign exchange, and the profit which exporters made by selling 
the bills which they drew on their foreign debtors was so great that they 
could afford to be satisfied with a small profit on the goods they sold, or even 
to sell them at a slight loss. The result was that French goods were sold 
abroad not so much because of the profit on the goods themselves as because 
exporters could thus draw bills of exchange on their foreign debtors and then 
sell these bills at a considerable gain. 



386 PRINCIPLES OF POLITICAL ECONOMY 

(1) When a bill of exchange is payable at a place that 
is far distant or inaccessible, the cost of shipping money 
would be very considerable, and fluctuations in the rate of 
exchange are likely also to be considerable. It is evident 
that a dealer having' payments to make at Khartoum or at 
one of the new towns that are springing up in the Klondike 
region, would regard himself as very fortunate in finding 
exchange payable at these places, even though he were 
obliged to pay a premium of 10 or 12 per cent. A creditor, 
on the other hand, who has drawn a bill payable at such a 
distant place, would be glad to negotiate it, even at 10 or 12 
per cent below par. 

(2) But it is especially when we have to do with a country 
whose money is depreciated, that fluctuations in the rate of 
exchange may become excessive and appear to have no limit 
at all. A bill of exchange on Rio Janeiro will bring only half 
its nominal value in London or Paris, because the Brazilian 
milreis, having a nominal value of 55 cents, is really worth 
only about 30 cents. Exchange payable in a depreciated 
money must necessarily suffer a depreciation equal to that of 
the money itself. Inversely, a bill of exchange on London 
or Paris brings, at Rio Janeiro, twice its nominal value in 
the money of the country. Even paper on Spain is worth 
only two-thirds of its nominal value. 

Not only paper money may be depreciated, but metallic 
money as well, and its depreciation has the same effect on the 
rate of exchange. This is true to-day of silver money, which 
has lost half its value. Hence all claims on countries having 
a silver money system, such as those of the Orient and Asia, 
lose half their value. Conversely, all claims on nations hav- 
ing a gold standard (payable at London, for example) bring 
a high premium in countries having a silver standard. This 
state of affairs naturally complicates business relations. 1 

1 It is especially in this connection that we notice the effects of the rate of 
exchange on exports and imports, referred to in a previous section (page 299). 
The Hindoo farmer who sells his wheat for 3 shillings a bushel in London can 



FLUCTUATIONS IK EATE OF EXCHANGE 387 

A study of the rate of exchange, therefore, enables us to 
understand the economic and monetary condition of a coun- 
try, even though we may have no other knowledge to guide 
us. A careful observation of the rate of exchange will per- 
mit us to tell whether a country buys more than it sells or 
sells more than it buys, whether or not it has a depreciated 
money, and what is the extent of the depreciation. 

(3) Finally, whenever the debtor finds it difficult to obtain 
gold, because his credit is limited, or because the banks make 
it hard for him to get bills discounted, or because the balance 
of trade (or, rather, of accounts) has drained the country of 
its gold, the rate of exchange may rise far above par. When, 
for example, France agreed to pay Germany a war indemnity 
of $ 1,000,000,000, France would have had some difficulty in 
securing enough gold to pay this enormous tribute ; there- 
fore the French government, in order to effect payment, 
sought everywhere for paper payable on Germany or even 
on London, in order to pay by way of arbitrage. 1 Hence the 
rate of exchange on Germany or even on London continued 
to be above par, not only in France, but elsewhere. 

negotiate Ms bill of exchange on London (payable in English gold money) 
for twice its value in Indian silver money. Conversely, the English manufac- 
turer who sells cloth or cotton goods to the Indies is obliged to negotiate his 
bill on Bombay or Madras for half its nominal value, because it is payable 
in silver money. He can, to be sure, for this reason double the price of his 
goods, but this will lead to the loss of some of his customers. 

1 Arbitrage is a variety of exchange business somewhat more complicated 
than the ordinary traffic in bills of exchange. 

We may describe it as follows : Paper on London is offered for sale in all 
commercial centres of the world. If it is too dear at New York, it may be 
purchased elsewhere at a lower price because of different commercial condi- 
tions. Arbitrage consists in buying exchange where it is cheap and selling it 
where it is dear. Arbitrage brokers facilitate international payment by 
extending the method of balancing accounts to all the nations of the earth. 
Dear commercial paper is the characteristic of countries having more debts 
than claims ; if these countries attempted to settle their debts directly, they 
could not do so by simply balancing accounts. But if the bankers in such a 
country purchase commercial paper abroad at the places where an inverse 
condition of affairs prevails and where they can buy bills at a low price, this 



388 PRINCIPLES OF POLITICAL ECONOMY 

X. A Rise in the Rate of Discount 

Banks incur the risk of being obliged to redeem a great 
quantity of their notes whenever considerable amounts of 
money must be paid to foreign nations. As these payments 
cannot be effected in paper money or bank notes, but only in 
coin, people will turn to the banks to convert their notes into 
specie. 

Suppose that as the result of a failure in the wheat crop, 
France is obliged to purchase 80,000,000 bushels of wheat 
from the United States. This means that the sum of about 
$60,000,000 must be sent to this country, and the banks of 
France may be sure that a great part, if not all, of this money 
will be withdrawn from their coffers. It is in the banks, as 
we have pointed out, that the floating capital of a nation 
accumulates, and people turn to the banks in time of need. 
This situation may become perilous for a bank if its reserve, 
and especially its gold reserve, is short. Fortunately, the 
banks are forewarned of this contingency by surer signs than 
the sailor obtains from the barometer, viz., by the rate of ex- 
change. For if the rate of exchange becomes unfavorable, 
i.e. if foreign paper is negotiated above par, the bank may 
conclude that debtors who have payments to make abroad 
are too numerous, — much more numerous than those who 
will receive payments from abroad, — and that as debts and 
claims do not equal each other, it will be necessary to ship 
specie abroad to settle the difference. (See page 298.) x 

will permit of regulating the nation's accounts by means of reciprocal claims 
and debts. 

If the method of payment by balancing accounts were confined to two 
nations, it would in many cases be practically impossible. The United States, 
for example, bought $143,000,000 worth of goods from the United Kingdom 
in 1901, and sold $631,000,000 ; on the other hand, we sold only $255,000 
worth of goods to Switzerland, and bought $16,000,000 worth. 

1 Even without supposing a rise in the rate of exchange, the gradual in- 
crease in the amount of commercial paper, coinciding with a decline in the 
amount of the cash reserve, indicates a disquieting situation. From the ob- 
servation of these two facts, M. Juglar has deduced a method of foretelling 



DECREASING NOTE CIRCULATION 389 

When the danger has thus been perceived, the next step is 
for the bank to take the necessary precautions against it. To 
guard against too great cash payments, the bank must adopt 
the measures necessary either to increase its reserve or to 
decrease the quantity of its notes in circulation or of its other 
demand liabilities. 1 It is not entirely within the power of 
the bank to increase its reserve, but it does possess the power 
not to issue any more notes, that is, to make no more loans 
to the public, either in the form of advances or in the form 
of discounts. (We know that the bank puts its notes in 
circulation in these two ways.) It is obvious that this plan 
will accomplish the desired result. In the first place, the 
issue of notes being arrested, the quantity of notes in circu- 
lation will not increase. In the second place, the commercial 
bills docketed at the bank fall due from day to day, and 
thus bring back to the bank either more notes (thus dimin- 
ishing the amount of notes in circulation) or more money 
(thus increasing the reserve). 

The quantity of notes in circulation may be compared to 
a volume of water increased by an inlet pipe at one end, and 
gradually diminished by an outlet at the other, in such a 
manner that the level may be kept constantly at nearly 
the same point. The stream of notes 2 enters the business 
world by issues from the bank (through discounting com- 
mercial paper), and ultimately ceases to circulate by being 
returned to the bank in the form of collections and deposits. 
If, therefore, the bank closes the inlet pipe (that is to say, 

economic crises. There is danger of a crisis whenever the two " curves," 
represented by the amount of the cash reserve and by the amount of the 
credit instruments in a bank's possession, tend to diverge rapidly; the oppo- 
site is the case when these two curves tend to meet. Experience, as a rule, 
has confirmed this ingenious theory. 

1 We have already explained how discounting (page 373) gives rise to so- 
called deposits which, although not made in money, nevertheless constitute a 
demand liability of the bank. 

2 This argument apparently presupposes the free issue of notes. But, as 
the student will learn by reading the section on the Organization of Banks, 
the free and unlimited right of issue does not exist in this country. 



390 PRINCIPLES OF POLITICAL ECONOMY 

if it ceases to issue any more notes) and leaves open the out- 
let (by continuing to collect paper that falls due, and to re- 
ceive deposits), it is obvious that all notes may ultimately be 
withdrawn from circulation. 1 

Nevertheless, the complete cessation of all advances and of 
all discounting business would be too radical a measure. It 
would, in the first place, by suppressing credit, provoke a 
terrible crisis in the country. It would, in the second place, 
work great injury to the bank itself by putting an end to its 
transactions and hence to its profits. The bank may bring 
about the same result in a less violent manner by merely re- 
stricting the amount of its advances and its discounts. To 
accomplish this it is sufficient to raise the rate of discount or 
to be more particular about accepting commercial paper that 
is offered for discount. It may do the latter by refusing to 

1 Suppose, for example, that the bank has on hand $1,000,000 worth of 
commercial paper falling due at more or less distant dates. Suppose, fur- 
ther, that it has a cash reserve of $1,000,000, and that its outstanding cir- 
culation of notes amounts to $2,000,000. 

Under such circumstances as these it is evident that if, as the result of a 
panic of some sort, all the holders of notes came to the bank and demanded 
their immediate redemption in specie, the bank would be unable to comply. 
But as soon as the bank has reason to fear such an eventuality, all that it 
will have to do is to cease discounting commercial paper. When this step has 
been taken, this is what will occur : The bills of exchange in the possession 
of the bank fall due from day to day, and all of its outstanding loans will 
return in ninety days at the outside, their average duration being much less 
than this. (See page 371.) When these loans have been paid, what will be 
the situation ? The bank, having received $1,000,000 in payment of bills that 
have fallen due, will now have $2,000,000, and this is precisely the quantity 
of notes in circulation. There is therefore no cause for alarm. But if the 
commercial paper has not been paid for in specie, but in bank notes, it follows 
that there are only $1,000,000 in notes still outstanding, and as this is the ex- 
tent of the reserve, there is in this case also no cause for alarm. 

If, however, the bills of exchange, etc., have been collected half in specie 
and half in the notes of the bank, the bank will then have on hand $1,500,000 
in specie, and the outstanding notes will equal the same amount. Hence, in 
this event too, there is nothing to be feared. Indeed, the same is true of any 
imaginable combination of circumstances, provided the amount of notes 
issued does not exceed the total capital of the bank. 



INCREASING THE RATE OF DISCOUNT 391 

buy bills that will not fall due soon, or the signature upon 
which does not seem to be sufficiently reliable. 

These measures, to be sure, however moderately they may 
be applied, are not agreeable to the business public. They 
are all the more unpleasant because they occur at the very 
time when there is need of specie, and because they make it 
harder to obtain specie. Banks have sometimes even been 
accused of provoking crises, and the complaint may readily 
find credence. To increase the rate of discount is certainly 
a heroic remedy, but it is nevertheless the one remedy that 
suits the situation, and a prudent bank must not hesitate to 
resort to it to defend its reserve. Experience has amply 
demonstrated its efficiency. 

This measure, moreover, is not only fortunate in its results 
for the bank, by warding off a threatened danger, but it has 
beneficial effects upon the country by favorably modifying 
its economic situation. Take a nation that is likely to be 
obliged to ship large amounts of specie abroad. A rise in 
the rate of discount, effected at the right time, reverses the 
economic situation by making the country a creditor of for- 
eign nations for considerable sums, and thus gives rise to an 
influx of money from abroad, or at least prevents the outflow 
of a nation's own supply of money. Let us consider what 
really takes place in such a case as this. 

The first result of a rise in the rate of discount is the 
depreciation of all commercial paper. A bill of exchange 
for $1000, which sold for §970 when the rate was 3 per 
cent, can be negotiated only for $930 when the rate has 
risen to 7 per cent ; this is equivalent to a fall in value 
of more than 4 per cent. 1 Henceforward the bankers of 
all nations, especially so-called arbitrage brokers, 2 will pur- 
chase bills of exchange in this country, because they can 
be bought here at a low price ; foreign nations will thus 
become our debtors to the extent of these purchases. 

1 In order Dot to complicate the problem, we are assuming that bills are 
for a term of one year. 2 See page 387. 



392 PRINCIPLES OF POLITICAL ECONOMY 

The second result is the depreciation of all stock- exchange 
securities. Every financier knows that the stock exchange 
is greatly interested in the rate of discount, and that a rise 
in the rate of discount almost always entails a fall in the 
value of stocks. Stock-exchange securities (especially those 
that are designated as international, because they are quoted 
on the principal stock-exchanges of the world), are frequently 
employed by merchants or at least by bankers in place of 
commercial paper, to pay their debts abroad. 1 Business men 
who cannot negotiate their commercial paper, or can do so 
only at a heavy loss, prefer to get money by selling whatever 
shares or stock securities they may possess. Hence these 
stocks tend to fall in value, just as commercial paper falls. 
But as a fall in the value of commercial paper results in an 
increased demand for it on the part of foreign bankers, 
similarly a decline in the value of stock-exchange securities 
gives rise to increased purchases of them by foreign capital- 
ists; and thus the United States will become the creditor of 
foreign nations to the extent of these purchases. 

Finally, if the rise in discount is great, and sufficiently 
lasting, it will cause a third result, viz., a fall in the price of 
commodities. We have just explained that business men who 
need money begin to obtain it by negotiating their commer- 
cial paper. When that resource fails or becomes too costly, 
they make use of whatever stock securities they possess: and, 
finally, if these various measures do not suffice, they must, in 
order to get money, sell the goods they have on hand. The 
natural consequence of this last measure is a general fall in 
prices. But this fall produces the same effects as those 
already considered, only on a larger scale: it stimulates pur- 
chases from abroad, increases the exportation of goods from 

1 If you have a payment to make in London, for example, the simplest 
plan is to obtain commercial paper payable in London ; but you can also use 
Italian Debt coupons, Lombard Railway debentures, Ottoman Bank bonds, 
etc., which are also payable in London, and which consequently constitute 
another sort of international money that is frequently used for this purpose. 



THE NATURE OF LAND CREDIT 393 

this country, and thus makes the United States a creditor of 
foreign nations to the amount of these purchases. 

All these effects may be summed up by declaring that a 
rise in the rate of discount creates an artificial scarcity of 
money, and thus involves a general decline in values. This is 
undoubtedly an evil. But it also gives rise, as a conse- 
quence, to large purchases from abroad and to the importa- 
tion of money. The ultimate effect is therefore beneficial, 
and is precisely the remedy best suited to the situation. 

XI. Some Special Forms of Credit 

§ 1. Land Credit. One of the oldest and simplest forms 
of credit is that based on land as security, and which takes 
the form of a mortgage. From the standpoint of the lender 
it possesses an advantage that has always made it a desirable 
investment, namely, an almost absolute security, due to the 
fact that land cannot be destroyed or stolen. But aside from 
this advantage, such loans possess great disadvantages for 
both parties concerned. They burden the borrower with a 
comparatively high rate of interest, — seldom less than 5 
per cent, — whereas the profits of farming generally bring 
a lower rate of return than this. Although the land on 
which a mortgage is based provides abundant security, the 
lender is unable to enforce payment very readily ; his claim 
is not easily sold, and when the time for payment arrives, it 
is often necessary for him to adopt measures that are as un- 
pleasant for him as for the unfortunate debtor, namely, 
seizure and ejection. 

The last source of objection may be removed to some 
degree, so far as the lender is concerned, by making mort- 
gages negotiable simply upon indorsement, like any other 
commercial credit ; in some countries this system has been 
introduced and carefully elaborated. But it is extremely 
doubtful whether any system, no matter how ingenious, will 
ever enable the holder of a mortgage to negotiate it as easily 



394 PRINCIPLES OF POLITICAL ECONOMY 

as he could commercial paper ; this would be contrary to the 
nature of things, for a mortgage will always to some extent 
partake of the immobility of the land upon which it is based. 

A more ingenious system consists in founding banks of a 
special nature, sometimes designated in France and Germany 
as land-credit societies. These societies play the part of 
intermediaries between capitalists and landowners. They 
borrow money from the former in order to lend it to the 
latter, and although they do not, of course, perform this 
service gratuitously, they offer some important advantages 
to both parties concerned. To the capitalist who lends 
money they offer credit instruments that are quite as safe as 
mortgages (inasmuch as they have the same security), but 
which are much more easily negotiable because they are not 
guaranteed by a particular piece of land, but by the entire 
assets of the society. As the society is generally a strong 
organization financially, the credit instruments which it issues 
circulate quite as readily as stocks or bonds. To the land- 
owners who borrow money through them, these societies offer 
the following three advantages : (a) the loans they make 
are for long periods, e.g. seventy-five years ; (5) repayment 
is effected very gradually, by means of small, almost imper- 
ceptible annuities ; (c) they exact a comparatively low rate 
of interest. 

For our own part, we do not highly appreciate the useful- 
ness of land credit, no matter what ingenious forms may be 
given to it. Without going so far as to lay down an absolute 
and rigid rule regarding this subject, we maintain from a 
general point of view that there cannot be any great social 
advantage in making it easy for the small landowner to 
borrow money by way of a mortgage. Such loans often 
end disastrously. We are rather disposed to accept the 
opposite idea and insist upon the adoption of measures to 
restrict the right of the farmer ( especially the small farmer ) 
to borrow money by offering his land as security. 

In the United States this is accomplished by means of so- 



RAIFFEISEN LOAN BANKS 395 

called homestead laws. The homestead may be defined as the 
house, and the land connected therewith, which forms the 
immediate residence of a family. Homesteads are secured 
beyond reach of creditors or liabilities on the part of their 
owners. The extent to which the homestead is exempt from 
seizure for debts varies, according to the laws of the various 
states, from $ 500 in Maine to §5000 in California. 

§ 2. Agricultural Credit. The farmer has need not 
only of the capital required to purchase a farm and its neces- 
sary equipment in buildings, etc., but also of a certain amount 
of floating capital to meet the expenses of carrying on agri- 
culture. Farming, by its very nature, does not yield its 
returns until the end of a year's work, and sometimes only 
after a much longer period of working and waiting. There 
is, however, during all this time a constant need of expendi- 
ture, and the farmer continually needs funds to meet these 
running expenses. It is the object of agricultural credit to 
provide capital for this purpose. 

Agricultural credit, in the sense here given to it, is not 
based on the land itself. It is secured either by the equip- 
ment of the farm, its cattle and crops, or by the personal 
solvency of the debtor, usually backed up by his membership 
in some organization which holds its participants liable for 
each other's debts. 

The second of these methods has made remarkable progress 
in Germany, in the form of mutual credit societies among 
farmers. These farmers lend money to each other through 
the medium of their societies, and employ their collective 
credit to obtain loans from outsiders upon terms much more 
favorable than any individual would be likely to receive for 
himself. The most celebrated of these organizations are the 
Raiffeisen Loan Banks, so named after their founder. They 
present the following features : (a) members, as such, make 
no payment to the organization, as there are no " shares " or 
" capital stock "; (5) they receive no dividends, and whatever 
profits there may be constitute a part of the general funds ; 



396 PRINCIPLES OF POLITICAL ECONOMY 

(<?) the members are all liable, to the extent of their property, 
for each other's debts. The last of these features explains 
the exceptional moral and educational value of these organi- 
zations. 

§3. People's Banks. It is a familiar remark that " only 
the rich can borrow," and the experience of every day seems 
to prove it. Yet the poor also may have need of credit, even 
more than the rich. How, then, can they obtain it? 

This problem is easily solved by cooperation. An isolated 
laborer or artisan, no matter how honest or industrious 
he may be, cannot furnish sufficient guarantee for a loan. 
Sickness, loss of work, and death, may at any time overtake 
him and make it impossible, despite his best intentions, to 
pay back what he has borrowed. But if laborers or artisans 
to the number of ten, a hundred, or a thousand are grouped 
in an organization, and held together, if need be, by the ties 
of collective responsibility, the security they have to offer 
will be considerably greater, and they will find it much 
easier to obtain credit without falling into the hands of 
usurers. The dues which are paid to such an organization, 
moreover, will ultimately build up a large amount of capital 
which the organization can lend to its members. 

Under the leadership of a man whose name is still con- 
nected with them, — that of Schulze-Delitzsch, — these coop- 
erative banks, the essential characteristic of which is the 
unlimited liability of all members, have achieved extraordi- 
nary success in Germany. 1 The heads of these associations 

1 The first of these banks was established in 1849. The system made but 
slow progress until 1860, when it grew more rapidly. According to the latest 
report issued (that of 1901) there were 949 German cooperative banking asso- 
ciations and 621 consumers' cooperative societies. Statistics are given for 
only 870 of the former, having a total membership of 511,000, a capital (in- 
cluding shares, deposits, and loans) of $200,000,000. The loans made to 
members amounted to nearly $575,000,000. Compared with this enormous 
amount of business, the losses were insignificant, — only one-twentieth of 
one per cent. The profits amounted to $3,000,000, most of which was divided 
among the members, — not, as the cooperative principle would seem to dic- 
tate, according to their loans, but according to the value of their shares. 



BUILDING ASSOCIATIONS 397 

hope that they will enable small-scale industry to compete 
with the larger industrial concerns, by helping them to obtain 
the capital and the equipment which they need. This will 
be an exceedingly important result, if ever it is accomplished. 

It should be pointed out, however, that these cooperative 
banks, whenever they succeed in sustaining small-scale com- 
merce and small-scale individualistic production, are accom- 
plishing an object diametrically opposed to that of consumers' 
and producers' cooperative associations. It is for this reason 
that cooperators of the latter type are not enthusiastic over 
institutions of the first-named variety. 

Apparently the only system which could to any noteworthy 
degree improve the conditions of our city working- classes is 
that which would grant credit to groups of producers and 
enable them collectively to acquire ownership of their instru- 
ments of production. (See the next Book.) Experiments 
along this line were made in France during the reign of 
Napoleon III. But up to the present, credit granted to 
groups of laborers for productive purposes has accomplished 
nothing of importance. 

§ 4. Building Associations. In England and the United 
States there seem to be no cooperative banks, strictly speak- 
ing. Cooperative credit in these countries has been confined 
almost exclusively to the so-called building and loan asso- 
ciations, the primary object of which is to enable working 
men to build or acquire homes for themselves, the property 
being mortgaged to the association till the amount advanced 
is fully repaid. 

The first building society in England was organized in 
1781, although societies of this sort were not recognized by law 
until 1836. By the year 1898 there were some 2500 of them 
in England, with aggregate assets of nearly $300,000,000. 
The first building association in America was organized at 
Frankford (now a part of Philadelphia) in 1831. Accord- 
ing to the Report of the Commissioner of Labor (1893) 
there are nearly 6000 such associations in the United 



398 PRINCIPLES OF POLITICAL ECONOMY 

States, with nearly 2,000,000 shareholders and assets of over 
$450,000,000. 

The building and loan association is practically a cooperative 
savings bank. Its chief advantage over the ordinary savings 
institution is that its funds are used by the depositors them- 
selves in their own interests, and not placed at the service of 
business men and corporations. Every member has a voice 
and vote in the management of the association, and shares 
in the profits. A board of managers has charge of super- 
vising the business of the association. As now commonly 
organized, they issue a fraction of the capital stock, usually 
one-tenth, in Avhat is known as a " series," and require that 
it be paid in monthly instalments, commonly called dues, — 
usually at the rate of $1 per month on a share of stock the 
par value of which is $200. Whenever the monthly pay- 
ments, plus the accumulated profits, equal the face value of 
the shares, the series is retired. A series usually extends 
over ten to twelve years. 

The money obtained by the association is loaned to share- 
holders who desire to buy or build homes. No member can 
borrow more than the face value of his shares. Thus, the 
man who has subscribed to five shares may borroAV as much 
as 11000, if sufficient funds are on hand. When the amount 
in the treasury is inadequate to meet the wants of all who 
wish to borrow, the loan is awarded to whoever will give the 
highest premium for the use of the money ; this " premium " 
consists in the payment of a few cents on each share, above 
and beyond the interest required by the association. 

As a rule, the money paid into the association by a bor- 
rowing member during the life of the series in which he is 
interested amounts to little more than the rental price of the 
mortgaged property for the same period ; hence it is some- 
times said by those who get homes with the help of a build- 
ing association that "the rent pays for the place." The 
borrower who regularly pays his dues and the interest on 
his loan will in a few years find himself in possession of 



THE THEORY OF FBEE BANKING 399 

paid-up shares which will cancel the principal of the debt 
when it becomes due and leave him owner of his house with- 
out encumbrance. 

There can be no doubt that these organizations have ren- 
dered noteworthy services. The 4500 societies for which 
reports were made in 1893 had helped in the acquisition of 
over 300,000 homes. It was therefore not entirely without 
justification that Hon. Seymour Dexter, president of the 
National League of Local Building and Loan Associations, 
declared these organizations "the most successful form of 
cooperation yet evolved ; every association the center of an 
influence stimulating industry, frugality, temperance, home- 
owning and good citizenship." 

XII. Free Banks 

The economists of half a century ago upheld the doctrine 
of free banks quite as strenuously as the doctrine of free 
trade. They insisted that there should be both free compe- 
tition and free issue ; in other words, that any one should 
have the right to engage in the banking business if he chose 
to do so, and that all banks should have the right to issue 
notes at their own discretion and upon their own responsibil- 
ity. Let us consider these two points. 

I. The argument advanced for free competition in the 
banking business was the classical plea that monopoly means 
dearness, whereas competition means cheapness. By dearness 
and cheapness in this connection they meant the high or low 
price demanded by the banks for their services. 

To this we may reply, first of all, that it is by no means 
certain that competition necessarily causes cheapness or that 
monopoly causes dearness. There are numerous exceptions 
to this economic principle, even with regard to the produc- 
tion of ordinary commodities (see page 153); and in the 
present case it is of particularly doubtful validity. Experi- 
ence does not prove that the cost of discounting is lowest 



400 PRINCIPLES OF POLITICAL ECONOMY 

wherever banks are most numerous. Although the Bank of 
France, for example, enjoys a privileged position, and does 
business by right of a government grant, its rate of discount 
rarely exceeds 3J per cent. 

It should be noted, moreover, that the above classical argu- 
ment has nothing to do with the most important aspect of 
the question. The problem of monopoly versus competition 
does not arise with reference to banking operations in 
general, nor especially with reference to discounting. No 
one denies the right of any bank or similar organization to 
discount commercial paper. Hence it is mainly with reference 
to the issue of notes that the problem of monopoly versus 
competition arises. But this problem concerns the gen- 
eral public much more than the commercial classes. The 
bank note is for its possessor simply a kind of money, and 
scarcely anybody advocates free competition in the issue of 
money. The right to coin money is reserved by the govern- 
ment to itself, and the Supreme Court of the United States 
has held that the power to issue paper money is one of the 
powers belonging to sovereignty. Therefore, when we have 
to do with the issuing of bank notes it is perfectly reasonable 
for the government, when it does not exercise this right, to 
confer it upon such institution or institutions as command 
the confidence of the nation. 

When there are many banks of issue there is likely to be 
a great variety of bank notes, unless the government provides 
for a uniform system such as that which prevails in the 
United States and Switzerland. There is, on the other hand, 
a reasonable hope that when there are but a few great banks 
or only one bank of issue in each country, we may more easily 
approach a state of affairs in which there will be but one 
kind of bank note, circulating in all countries without diffi- 
culty and thus realizing the long-sought ideal of a universal 
money. (See page 227, note 1.) 

II. As regards the unrestricted issue of notes and the sup- 
pression of all governmental intervention in this respect, the 



ARGUMENTS FOR FREE ISSUE 401 

stock argument is that there can never be any danger of an 
excessive issue of notes. This clanger, it is claimed, is purely 
illusory ; the simple play of economic forces will confine the 
issue within proper limits, even though the banks should try 
to overstep them. The reasons given for this are three in 
number : — 

(a) In the first place, bank notes are issued only in the 
course of banking operations, i.e. by way of discounts or 
advances on credit instruments. In order, therefore, that 
bank notes shall circulate, it is not sufficient for the bank 
merely to desire that they shall do so ; some one must be 
disposed to borrow money from the bank and to accept its 
notes. Issues are thus regulated by the needs of the public, 
and not by the wishes of bankers. The quantity of notes that 
the hank can issue depends on the amount of commercial paper 
presented for discount, and the quantity of this paper depends 
in turn on the condition of business. 

(5) Again, bank notes circulate only for a short time. A 
few weeks after being issued, they return to the bank. 
Take, for example, a note for $100 which is issued in exchange 
for a draft ; in a few weeks, — ninety days at the most, — 
when the bank collects the draft, the $100 note will probably 
be returned. Perhaps it will not be the same note. But 
what does that matter, provided it be a bank note ? The bank 
will, in the course of a month's or a year's business, take in 
about as many notes as it issues. 

(e) Finally, even admitting that the bank could issue an 
excess of notes, it will be impossible to keep them in circulation ; 
for if too many are issued they will necessarily be depreci- 
ated, and as soon as they are depreciated (no matter how 
small the depreciation may be) the holders of notes will 
bring them to the bank and demand payment. It is, there- 
fore, useless for a bank to inundate the public with notes, 
because the bank will in turn be inundated with them. 

The above three arguments certainly contain an element of 
truth, and experience has generally confirmed them. Banks 



402 PRINCIPLES OF POLITICAL ECONOMY 

have rarely succeeded in putting more notes in circulation 
than the public requires. Yet we cannot disguise the fact 
that the absolutely unrestricted right of issue may create 
grave dangers, at least in times of crises, — and crises are 
becoming more and more frequent occurrences in the eco- 
nomic life of modern society. 

No doubt it is true that in theory the amount of notes 
issued depends on the public need for them and not on the 
will of the banks ; but if an unscrupulous bank should aim 
solely at attracting customers, it could, by sufficiently lower- 
ing the rate of discount, largely increase its business and thus 
augment the amount of its notes in circulation. It is like- 
wise true that notes issued in excessive quantities by such a 
bank will be returned to it for payment as soon as they 
become depreciated. But it must be remembered that this 
depreciation does not take place immediately. It will require 
several days, perhaps several weeks. If, during this period, 
the bank has issued an excessive quantity of notes, it will be 
too late when they return; the bank will no longer be able 
to redeem them and will be " swamped " by its own excessive 
issues. The bank itself will, to be sure, be the first party to 
suffer by its own mistake. But this does not concern us 
here ; we are now examining the possibility of a crisis, and 
not at all concerned with the punishment of its authors. 

XIII. The Organization of Banks 

We have already pointed out that the two important 
problems which arise in connection with banking are indi- 
cated by the questions : (1) Shall anybody and everybody 
have the right to start a bank if he chooses ? (2) What re- 
strictions, if any, shall be established concerning the issue of 
notes by banks ? To answer these two questions satisfac- 
torily is to solve the fundamental problems of bank organi- 
zation. 

The system of absolute liberty adverted to in the preceding 



GOVERNMENT BANKS 403 

section, i.e. free competition in the issue of bank notes, and 
the total absence of restriction, is practised almost nowhere. 
The only example is that of Scotland ; and although legally 
free competition prevails in that country, there are in reality 
only a few banks, each having very numerous branches, 
which possess the right of issue. Although, moreover, there 
is no regulation of issues, strictly speaking, a very effective 
guarantee consists in the fact that all shareholders are liable, 
without limit, for all the obligations of the bank, including 
the notes issued by it. 

Everywhere else, either a system of monopoly, or of restric- 
tion and regulation by law, has prevailed ; generally there 
has been a combination of both systems. Where the mo- 
nopoly system obtains, the sole right to issue notes is exer- 
cised either directly by the government, — in which cases we 
speak of Government Banks, — or else it is conferred by the 
government on some private bank which offers certain guar- 
antees. The system of government banks prevails only in 
Russia, Sweden and (since a short while ago) Switzerland. 
Although this arrangement is favored by socialists, who 
regard it as the " socialization " of credit and as one of the 
steps toward the collectivist state, it is generally condemned 
as giving the government a commercial character for which 
it is ill suited, and as preparing the way for issues of paper 
money by giving rise to an unfortunate confusion of govern- 
ment credit with the credit of the bank. 

In most countries a combination of both systems has been 
adopted; that is to say, some adjustment by which there is 
neither an absolute government monopoly of the right to 
issue notes, nor the full and unrestricted permission for 
everybody to issue them. The experience of our own country 
in this respect has been sufficiently varied to exemplify the 
nature of the difficulties encountered in the organization of 
banks of issue. 

Early American banks. At the present time the issuing of 
notes is not regarded as a necessary function of banks, nor 



404 PRINCIPLES OF POLITICAL ECONOMY 

is it the chief part of their business. But in the early his- 
tory of our country the main business of a bank was to issue 
" circulating notes." In New England the commonest concep- 
tion of a private bank was that of a company or partnership 
formed to supply circulating notes as a medium of exchange 
in addition to the "bills of credit " issued by the colonial 
governments. In the charters of the earliest banks, such as 
the Bank of North America, there is no mention of circula- 
ting notes, since the right to issue them existed without leg- 
islative authorization. It was generally believed, moreover, 
that if these circulating notes were based on landed security, 
current redemption would not be necessary. In this view, 
no capital was needed to start a bank, but merely confidence. 

The first bank in the modern sense of the term appears to 
have been the Bank of North America, conceived by Robert 
Morris, the financier of the Revolution, and chartered by the 
state of Pennsylvania in 1781. It was closely followed by 
the Bank of Massachusetts, chartered in 1784, and the Bank of 
New York, which began business in the same year. The 
last-named institution owes its foundation to Alexander 
Hamilton, who counselled the New York merchants against 
the " land bank " which they were about to found, and who 
drew up articles for a "money bank " in its stead., 

The two United States Banks. Hamilton was also respon- 
sible for the conception of the first Bank of the United 
States, chartered by Congress in 1791. The capital was 
110,000,000, of which 18,000,000 was open to public sub- 
scription, and the remainder subscribed by the United 
States government. It was provided that payment should 
be made one-fourth in specie and three-fourths in govern- 
ment obligations bearing 6 per cent interest. This pro- 
vision naturally strengthened the credit of the government 
by creating a demand for its obligations. At the same time 
the government pledged itself to grant no other charter 
for a bank during the continuance of this one, which was 
limited to twenty years. The bank could not be indebted 



BANKS OF THE UNITED STATES 405 

for a greater amount than its capital stock, over and above 
the amount of its deposits ; that is, the deposits were not to 
be counted as liabilities, in estimating its rights to contract 
debts. This meant substantially that the notes issued by the 
bank might be equal in amount to the capital stock. The 
notes of the bank were made receivable for all public dues so 
long' as they were payable in gold and silver coin. 

The concensus of opinion with regard to this bank is 
strongly in its favor. It served as a regulator of the cur- 
rency and maintained a high standard of commercial honor. 
Unfortunately, the renewal of the charter was made a politi- 
cal issue. The weakness of the Federal party, which had 
been favorable to the bank, and the opposition of the state 
banks who wished to get rid of a superior rival, resulted in a 
refusal to renew the bank's charter. 

The state banks now held the field alone. Almost all of 
them were of the joint-stock type, based on the principle of 
limited liability. 1 In 1812, a year after the charter of the 
Bank of the United States had expired, the second war with 
Great Britain began. A short time afterward nearly all the 
banks of the country except those of New England suspended 
specie payments. This was followed by an enormous increase 
of issues, so that the outstanding notes, which had been esti- 
mated at 120,000,000 in 1811,' rose to somewhere between 
162,000,000 and $70,000,000 in 1813, and to somewhere 
between $99,000,000 and $110,000,000 in 1815. The circu- 
lating paper was of every degree of value, down to utter 
worthlessness. 2 These flagrant evils of the financial system 

1 Concerning these banks Mr. J. R. McCulloch wrote as follows : " Had a 
committee of clever men been selected to devise means by which the public 
might be tempted to engage in all manner of absurd projects, and be most 
easily duped and swindled, we do not know that they could have hit upon 
anything half so likely to effect their object as the existing American banking 
system. It has no redeeming quality about it, but is, from beginning to 
end, a compound of quackery and imposture." 

2 Professor W. G. Sumner, in his " History of American Currency " tells 
of one bank in Massachusetts with a nominal capital of $1,000,000. Only 



406 PRINCIPLES OF POLITICAL ECONOMY 

called for reform, and as a result the second Bank of the 
United States was chartered in 1816, on a similar plan and 
with the same general objects as the first bank of the same 
name. The capital was $35,000,000, of which the govern- 
ment subscribed one-fifth. During its early history the bank 
was shamefully mismanaged, but it was later restored to a 
sounder position. The notes of this bank, too, which were 
required to be paid in specie, were receivable for all public 
dues. It brought about the resumption of specie payments 
and put an end to the disorders and fluctuations which had 
previously prevailed. 

This bank, like its predecessor of the same name, was 
drawn into politics when the question of a renewal of its 
charter arose during Jackson's first administration. The 
recharter of the bank was made the main political issue of 
1832, and Jackson's opponents, who defended the bank, were 
defeated. Thus, in 1836, the charter expired and Congress 
refused to grant a new one. 

The State Banks up to 1863. There seems no doubt that 
the evils of this period were due chiefly to vices of banking. 
The facility of local issue, without the reality or scarcely the 
pretence of redemption, made the banks reckless as to the 
character of the enterprises to which they gave assistance ; 
while the money thus put into circulation enhanced prices 
and still further stimulated both speculative investments and 
speculative trading. The retribution came in the panics of 
1837 and 1839, during which the United States lost the 
deposits it had placed in the private banks, and in the long 
and dreary prostration of industry which followed. 1 

The first improvement in the state-bank system originated 
in Massachusetts,' where the Suffolk Bank in Boston, char- 

$19,141.46 was ever paid in ; and of this the directors subsequently withdrew 
their own subscriptions, leaving $3,081.11. One man bought out eleven 
directors for $1300 and then loaned himself $760,265. When the bank failed, 
it had $86.46 in specie, whereas the notes outstanding were estimated at 
$580,000. 

1 See Francis Walker, " Political Economy," page 441. 



BANKING EXPERIMENTS 407 

tered as an ordinary bank of issue and deposit in 1818, offered 
to redeem country bank notes at par if the issuing banks would 
provide funds for that purpose, and would also make perma- 
nent deposits in the Suffolk Bank (which regarded the use of 
these deposits as a compensation for its services). At first 
only a few of the country banks acceded to this proposal, 
whereupon the Suffolk Bank made it a point to send home 
for redemption all the notes of the non-assenting banks 
which it could find. Eventually all the country banks were 
forced into the arrangement, because it was found that under 
the new system their credit was so much improved that their 
notes acquired circulation in all parts of the United States 
and Canada. 1 

Two important banking experiments were tried in New 
York by the legislature of that state, known respectively as 
the safety-fund system and the free-bank or bond-deposit 
system, both of which found imitators. The first of these, 
introduced by the law of 1829, was practically a mutual 
insurance of the banks for the protection of their creditors. 
It provided that every bank chartered under it should pay 
into a " bank fund" one-half of one per cent of its capital 
each year, until the fund should be equal to three per cent of 
its capital stock. This fund was to be applied solely to the 
payment of the debts of insolvent banks after their assets 
were exhausted. Whenever the fund should be reduced, the 
banks were called upon for fresh contributions at the same 
rate as the original ones. The law also provided for the 
appointment of three commissioners to examine all the banks 
three times a year, or oftener if required to do so. Any three 
banks might call for a special examination of any bank in 
the system. 

It is probable that the safety-fund would have proved 
ample indemnity to the holders of bank notes if it had 
not unfortunately been applied to the payment of other 
debts than those due for circulation ; but the numer- 

1 See Horace White, "Money and Banking," second edition, page 325. 



408 PRINCIPLES OF POLITICAL ECONOMY 

ous bank failures of 1840-1842 exhausted the fund. Many- 
banks, moreover, fraudulently issued more notes than was 
allowed by law. This was made possible by the absence of 
anything like a proper system of public registration or super- 
vision of issues. By the time that the system had been 
brought nearer perfection by amendments of various kinds, 
the charters of the "safety banks" expired, and the national 
bank system was established. 

The second New York experiment, — more radical than 
the first, — was begun in 1838. Before that year no one 
could get a banking charter in the state of New York without 
a special act of the legislature, and no one could invest 
money in a new bank without the consent of the bank com- 
missioners of the state. The right to start a bank was made 
a part of the spoils of the triumphant political party, and 
this corrupt state of affairs led to a popular reaction and to 
the passage of a law enabling any person or association of 
persons to engage in the business of banking, and to circu- 
late notes on condition that these notes be secured by deposits 
of such public stocks, bonds, mortgages, etc., as were ap- 
proved by the state comptroller. Later the law was amended 
so that only the stocks of the United States and of the state 
of New York should be accepted as security for the note 
issues of the free banks. 1 

In several of the states which followed the example of 
New York, the free-bank and bond-deposit system proved a 
failure because bad securities were taken for the note issues. 
Before these states had time to perfect their system, the Civil 
War broke out, and the National Bank Act soon afterward 
superseded all other systems. 

The National Banking System. The financial necessities of 
the Civil War made it desirable to place large government 

1 The National banking system was to some extent modelled upon this 
New York bond-deposit system. 

Besides the banks of Massachusetts and New York, to which we have 
had occasion to refer because of the experiments which they tried, important 



AMERICAN NATIONAL BANKS 409 

loans upon the market. Accordingly, Mr. Chase, Secretary of 
the Treasury, advocated a system of " national banks " whose 
note issues should be secured by an abundant deposit, at the 
Treasury department, of United States bonds. In order that 
these banks should have a practical monopoly of the right of 
issue, the state banks were to be obliged to pay a virtually 
prohibitive tax of 10 per cent on their notes. These sugges- 
tions were not all carried out until 1865, and although their 
adoption came too late to be of any help in the financial diffi- 
culties of the war, they resulted in placing the bank currency 
of the country on a more secure and convenient basis. 
Before this time, the innumerable state banks, under special 
charters, and practically subject to no real regulation or 
supervision, had put into circulation the most heterogeneous 
bank money conceivable. Part of this money was subject 
to a discount of as much as 25 per cent when offered 
for acceptance far away from the place of issue, or when 
issued by a bank whose name was not familiar. This unwill- 
ingness to accept some of the bank money is perfectly 
comprehensible when we recall that banks were constantly 
failing, that there was an abundance of notes issued by banks 
which had no real existence save in the minds of the rogues 
who manufactured the notes, and that professional sharpers 
made it a business to alter or counterfeit bank notes. 1 
Under the new system all these evils disappeared, and now a 

progress was made by the banks of some other states. A Louisiana law of 
1842 required the banks of that state to keep a cash reserve in a definite pro- 
portion to their deposits and circulation. This appears to be the first law of 
its kind in America. 

1 Those who were in the habit of receiving bank notes found it necessary 
to study carefully the " Counterfeit Detectors" and other publications whose 
purpose it was to inform their readers what notes to accept and what notes to 
refuse. One of these detectors (Bicknall's " Counterfeit Detector and Bank 
Note List " of January 1, 1839) contained the names of 54 banks which had 
failed; of 20 fictitious banks, the pretended notes of which were in circula- 
tion ; of 43 other banks for the notes of which there was no sale ; of 254 banks 
the notes of which had been altered or counterfeited ; and enumerated 1395 
descriptions of counterfeited or altered notes then supposed to be in circu- 



410 PRINCIPLES OF POLITICAL ECONOMY 

national bank note issued in one state will circulate all over 
the Union as readily as at home. 

The principal features of the national banking system, as 
at present organized, are as follows: — 

There is a bureau of the Treasury Department, the chief 
officer of which is the Comptroller of the Currency, having 
the duty to take charge of all matters relating to the "national 
banks." A national bank is organized in much the same way 
as any other corporation, by any number of persons not less 
than five. Upon application to the Comptroller the corpora- 
tion will be granted or refused a charter, according to the 
decision of the Comptroller. When granted, the charter 
continues for not more than twenty years, but is renewable 
with the consent of the Comptroller. Each bank is required 
to report its condition five times a year. 

The minimum amount of capital which a national bank 
must have depends on the population of the place in which 
it is located, but can never be less than $25,000, and in cities 
having a population of 50,000 it must be at least 1200,000. 
Each national bank, beside being allowed to carry on the 
ordinary business of a bank (making loans, discounting notes, 
buying and selling exchange) is allowed to issue " national 
bank notes" for circulation as money of the United States. 1 

lation, of denominations from $1 to $500. In 1859, Nicholas' "Bank Note 
Reporter" had 5400 separate descriptions of counterfeit, altered, and spurious 
notes. (See Horace White, " Money and Banking," second edition, page 352.) 

1 There are at present six kinds of paper money in use in this country. 
These are: (1) United States notes, or "greenbacks"; (2) silver certifi- 
cates ; (3) gold certificates ; (4) Treasury notes of 1890 ; (5) national bank 
notes, as above described ; and (6) currency certificates. 

We have already referred to all of these in detail except the Treasury notes 
of 1890 and the currency certificates. The issue of the former was provided 
for by the Sherman Act of 1890, according to which a certain amount of 
silver bullion was to be purchased monthly by the Secretary of the Treasury. 
This bullion was to be paid for by a new kind of paper money, called Treas- 
ury notes of 1890. 

"Currency certificates" are issued to national banks in exchange for 
United States notes deposited in the Treasury. Their denominations are not 
less than $5000. 



NATIONAL BANKS 411 

The stock-holders are liable for the debts of the bank up 
to double the par value of their stock. 

When a national bank is organized, it must invest in United 
States bonds a sum of money equal to at least one-fourth of 
its capital. These bonds must be deposited in the Treasury 
of the United States ; but they are still the property of the 
bank, which receives the interest on them. Upon the secur- 
ity of these bonds the bank receives from the Comptroller an 
amount of national bank notes equivalent to the par value of 
the bonds deposited. . Then the president and the cashier of 
the bank sign each note, and they may be loaned or paid 
out. If the bonds should ever fall below par, the Comptrol- 
ler may require additional security. 

The national bank notes are not legal tender, although the 
government will receive them for all taxes except duties on 
imports. Each national bank is required to receive the notes 
of every other bank at par value, and to redeem its own notes 
on demand in legal-tender money. If it cannot do this, the 
Comptroller will sell the bank's bonds and thus obtain money 
to redeem them. The banks, moreover, must deposit in the 
Treasury a fund in lawful money (bearing no interest) equal 
to 5 per cent of their outstanding circulation ; this fund, 
which is counted as a part of the lawful reserve, is intended 
to be used for the redemption of notes in sums of $1000 or 
any multiple thereof. 

Each bank is required to keep a reserve of lawful money. 
In the so-called " reserve cities " designated by Congress the 
amount is 25 per cent of their deposits. Banks outside 
these cities need keep a reserve of only 15 per cent of 
their deposits ; they may, moreover, deposit 60 per cent 

On October 1, 1902, the circulating currency of the United States was 
made up as follows : — 

Metal. Gold coin, $024,728,060; standard silver dollars, $75,043,729; 
subsidiary silver, .$89,906,205. 

Paper. Gold certificates, $304,382,054; silver certificates, $459,571,478 ; 
Treasury notes of 1890, $26,741,790; United States notes, $342,930,086; 
national bank notes, $352,383,259. 



412 PRINCIPLES OF POLITICAL ECONOMY 

of their reserves in "credit reserve cities," i.e. in New York, 
Chicago, and St. Louis. 

The national banks are taxed one-half of one per cent on 
their circulation, 1 whereas the state banks (as we have said) 
must pay 10 per cent. The object of this vast difference is 
to compel the latter banks either to come into the national 
system or to cease issuing notes to circulate as money. 

It is evident that one great merit of this system is the 
unification of banking in all the states and territories. In 
fact, all the national bank notes of similar denomination,-^ the 
smallest denomination is $5, — present a similar appearance, 
being manufactured by the United States government on a 
uniform plan. Inasmuch, furthermore, as the government 
bonds have always commanded a premium, there has never 
been any doubt as to the soundness of the currency issued 
under this system. " With regard to its volume, " says 
President Hadley, " there have been many complaints. For 
some years the banks were anxious to increase their circula- 
tion, and a limitation on the total amount which they were 
allowed to keep outstanding was considered a hardship. 
After 1880, on the other hand, the price of the United States 
bonds became so high as to render the maintenance of the 
circulation unprofitable, and a large amount was surrendered, 
reducing the total volume of the bank-note issues to a figure 
less than half of that which the law would have allowed." 2 

The Bank of England. In 1694 the English govern- 
ment required a loan of £1,200,000 to continue the war 
against France. The subscribers to this loan were formed 
into a chartered company known as the Bank of England, 
which was given the right to issue interest-bearing notes to 

1 When the bonds deposited by a bank bear more than 2 per cent 
interest, a bank must pay 1 per cent annually on the average amount of its 
notes in circulation. The tax does not apply to circulation for the retirement 
of which lawful money has been deposited in the Treasury. 

2 Hadley, " Economics," page 256. On September 1, 1902, there were 4269 
national banks, with a total capital of $673,763,767, and the amount of 
national bank notes in circulation was about $350,000,000. 



PEEL'S ACT OF 1844 413 

the amount of the loan. Three years later the bank made 
another loan to the government, and was authorized to issue 
demand notes, payable to the bearer, for a total amount 
equal to the new loan. These notes were accepted by the 
public, at par, quite as readily as those previously issued. 
A few years later (1709) Parliament decreed that no other 
corporation or partnership of more than six persons should 
exercise the right to issue demand notes in England. This 
restriction did not concern Scotland or Ireland. 

The charter of the bank was renewed from time to time, 
usually on the condition of new loans to the government, or 
a reduction of the rate of interest on former ones. These 
loans to the government for war purposes became so large 
and so frequent that the bank was obliged to suspend specie 
payments from 1797 to 1821. 

In 1826 the monopoly of the bank was relaxed, and the 
privilege of note issues was granted to joint-stock banks at 
a distance of sixty-five miles or more from London. By 1844 
seventy-two such banks had been established. In 1829 the 
issue of £1 bank notes was suspended in England, and the 
issue of notes smaller than £5 was prohibited, for the purpose 
of "saturating the currency with a larger infusion of gold." 

In 1833 Parliament passed an act making the notes of the 
Bank of England, so long as they are redeemed in gold on 
demand, legal tender at all places in England and Wales 
except at the bank itself. 

The crisis of 1836 and 1839, ascribed to the over-issues of 
bank paper, led to a movement in favor of reform. No 
change, however, was effected until Sir Robert Peel's Act of 
1844. By this act the issue of notes was made automatic, 
and all discretionary power in this respect taken out of the 
hands of the bank authorities. The Bank of England was 
divided into two distinct departments. One of these depart- 
ments was charged with banking operations (deposits and 
discounts), but had no right to issue notes. The other was 
entrusted with the issuing of notes, but permitted to trans- 



414 PRINCIPLES OF POLITICAL ECONOMY 

act no banking business. The sum of £14,000,000 of secu- 
rities, including the government's debt to the bank, was 
transferred to the issue department, which should turn over 
to the banking department £14,000,000 of notes. This was 
the average amount of the bank's notes then outstanding. 
Above and beyond this sum, the issue department could issue 
notes to any persons only in exchange for gold coin or stand- 
ard gold bullion. Banks and banking firms having the right to 
issue notes at that time were allowed to continue to issue the 
same average amount of notes ; but if they should cease to 
do so, the Bank of England might be authorized by the Privy 
Council to issue two-thirds of the amount so withdrawn, by 
adding an equivalent sum to the government securities in the 
issue department. Under the operation of this clause the 
circulation of the bank against securities has been gradually 
raised to £17,775,000. Every note beyond this sum must 
be based on an equal amount of coin or bullion placed in the 
hands of the bank. Even the bank itself cannot get notes 
on terms different from these. When it wants fresh supplies 
of notes, it must take gold out of the banking department 
and transfer it to the issue department ; and to recover gold, 
it must reverse the process. To all intents and purposes the 
Bank of England note is of the same nature as our gold 
certificate. (See page 259.) 

Three times, during the crises of 1847, 1857, and 1866, this 
system has been found wanting, and the government has 
suspended the restriction on the note issues of the bank and 
given it the discretionary power which the Act of 1844 had 
been designed to take away. In all these instances the 
panic subsided as soon as it was known that notes could be 
had at a reasonable price. It must not be supposed, however, 
that the suspension of the Act meant the suspension of specie 
payments, but simply that the bank might issue notes at its 
own risk, without a corresponding deposit of gold. What- 
ever notes the bank puts out at any time it must redeem in 
gold on demand. 



THE BANK OF FRANCE 415 

It cannot be said that the monopoly system prevails in 
England. The Bank of England has no exclusive right to 
issue notes, except so far as London is concerned. Nor is 
the English system one of free competition, inasmuch as the 
number of banks that may issue notes is limited to those that 
possessed this privilege in 1844. These private banks, how- 
ever, are not immortal, but will doubtless disappear sooner 
or later; and when there are none of them left, the Bank of 
England will possess a virtual and legal monopoly of the 
right of issue. As a matter of fact, the number of these 
provincial banks of issue has fallen since 1844 from 279 to 63. 

The Bank of France. The Bank of France has the sole 
right to issue notes. It is not, as is sometimes asserted, a 
government bank, but a stock company, organized like any 
other stock company whose capital is furnished by private 
citizens ; except that, instead of being managed wholly by 
the stockholders, its governor and vice-governor are ap- 
pointed by the government. 

The Bank of France was founded by Napoleon while he 
was yet First Consul, on February 13, 1800. But its privi- 
lege of issuing notes dates only from 1803. Even then it 
could exercise that privilege only in Paris and in cities in 
which it established branches. Subsequently other banks re- 
ceived the same privilege in the principal provincial cities. 
But after 1848, when these banks were merged in the Bank 
of France, it exercised the exclusive right of note issue in the 
whole of France ; the right has been renewed several times 
for periods of thirty years, and in 1897 was again extended 
till 1920. This privilege, however, is not conferred on the 
bank gratuitously, but is made subject to numerous condi- 
tions, of which the following are the most important : — 

(1) The Bank is permitted to discount only such bills of 
exchange as bear three signatures and are drawn for ninety 
days at the most. 1 

1 It should be added that the Bank is obliged to charge the same rate of 
discount for everybody, and that it is unable to charge a rate determined by 



416 PRINCIPLES OF POLITICAL ECONOMY 

(2) It is not allowed to pay interest on its deposits. 

(3) It can make loans on certain kinds of securities or on 
bullion; but it must not permit customers, — except the 
government, — to overdraw their accounts. To the govern- 
ment it is obliged to make certain "uncovered" loans. 1 

(4) It cannot issue notes to a larger amount than 5,000,- 
000,000 francs (11,000,000,000). 

(5) It is obliged to share its profits with the government 
according to a rather complicated method of calculation 
based on the amount of notes issued and the rate of discount. 2 

In the ordinary business of banking, such as discounting 
and dealing in exchange, the Bank of France has many com- 
petitors, not only in private banks, but in great banking 
associations which possess immense capital. In fact, the Bank 
does comparatively little discounting, and the volume of its 
discount business is now decreasing. Its true function as 
a banking institution is, as some have expressed it, that of a 
" bank of banks " and a treasurer for other institutions. 
Whenever the latter need money, or simply want to avoid 
the trouble of collecting payment for commercial paper, they 
get the Bank of France to re-discount the paper they have 
accepted ; thus they relieve themselves of the necessity of 
keeping a large specie reserve. It may be said, therefore, 
that the whole credit of the country depends indirectly on 
the reserve of the Bank of France. This great responsibility 
explains why the Bank must keep an enormous reserve, 
which now amounts to over $600,000,000. 

the solvency or amount of the credit instruments presented by each customer, 
This inability to do as the other banks do is troublesome to the Bank and 
reduces its opportunities of profit ; but it is due to the theory that small mer- 
chants should not be obliged to pay more than large business concerns. 

1 The law of 1897, by which the charter of the bank was renewed, obliges 
the Bank to lend to the government, without interest, the sum of 180,000,000 
francs, — aside from the sum of 40,000,000, which it lends for agricultural 
credit associations. 

2 The government's share in 1900 was 5,655,000 francs. If we add to this 
the taxes on notes, and other taxes, the state received 8,783,000 francs, — 
almost one-fourth as much as the shareholders. 



PROVISIONS FOR REDEMPTION 417 

Whether the system adopted by a nation be that of com- 
petition or that of monopoly, some arrangement (except in 
Scotland) is always devised to insure the redemption of the 
notes. Four systems may be distinguished, each of which 
has been tried in some country : — 

(1) The first consists in limiting the amount of the notes in 
circulation by the amount of the reserve. 1 

This is the system applied to the Bank of England by the 
Act of 1844, according to which, as we have seen, the bank 
can issue notes only to the amount of its reserve, plus 
£17,775,000. Why was this additional amount of notes 
allowed ? Because the British Parliament considered that 
within this limit there was no danger of the bank's inability 
to redeem its notes, the greater part of these £17,775,000 
being a national debt, the redemption of which is conse- 
quently guaranteed by the government, and the remainder 
being equivalent to the amount of notes for which payment 
will never be demanded, because they are lost or too far 
distant. 

In the case of any other bank than the Bank of England, 
this limitation could not be regarded as furnishing a very 
satisfactory guarantee for specie payment. The capital of a 
bank is not an asset that can be converted into money imme- 
diately, especially when, as in this case, it is represented for 
the greater part by a mere claim on the government. 

In practice, moreover, and precisely in times of crises, this 
limitation has been found so unsatisfactory that it has thrice 
been suspended and the bank permitted to exceed the legal 
limit. It is obvious that if the bank happens to have a 
reserve of £20,000,000, and £37,775,000 of notes in circula- 
tion, it will be obliged to refuse all discount. For with what 

1 This is what is generally known as the "currency principle" for regu- 
lating circulation, as opposed to the "banking principle" or principle of 
bank liberty, to which we shall refer later. The currency principle is based 
on the belief that something more than sound banking is needed to give a 
country good bank money. 



418 PRINCIPLES OF POLITICAL ECONOMY 

could it discount the bills presented ? Not with notes, be- 
cause the limit of ,£17,775,000 is already reached. Nor with 
the specie in its reserve, because if the reserve were reduced 
by only one shilling (the amount of notes in circulation still 
remaining £37,775,000) the permissible margin would be 
exceeded, and the law violated. Yet the Bank of England 
cannot refuse discount without involving the destruction of 
a large part of the nation's business ! The worst feature of 
all this is that it becomes necessary to suspend the law, and 
that the government, not the Bank, should assume the terrible 
responsibility. 

(2) The second method consists in fixing a certain ratio 
(generally one to three) between the amount of the reserve and 
that of the notes issued. This rule is observed in Belgium and 
Germany, 1 but not by the Bank of France (although a popu- 
lar misconception has given rise to the contrary impression). 
This system is more elastic than the preceding one, but leads 
to the same result, at times making all discount and even all 
conversion of notes impossible, and thus creating the very 
danger that we are seeking to avoid. 2 

(3) The third plan consists in simply fixing a maximum of 
issue. 



1 In Germany the value of notes issued may not, as a rule, exceed 
three times the reserve, and the two-thirds of this excess over the reserve 
must be secured by credit instruments in the possession of the bank, that is, 
by bills' of exchange due in ninety days or less. 

In case of an emergency, however, the bank may issue notes beyond this 
statutory limit, but in this case it must pay the enormous tax of 5 per cent 
of the value of notes thus issued. This measure is not unlike the suspension 
of the Peel Act in England. But it is much more practical, because there is 
no need to call for the intervention of the government and the legislature ; 
the bank itself raises the barrier, so to speak, without causing any public 
sensation or a panic. 

2 Let us suppose that the reserve is $100,000,000 and the issue of notes 
$300,000,000, for the sake of illustration. This would be the limit of issue 
allowed by law under the above condition. But at this stage the bank cannot 
redeem a single note without reducing its reserve to less than one-third the 
amount of notes, — for 99,999,099 is not a third of 299,999,999. 






BOND SECURITY FOR NOTES 419 

This system is practised in France. 1 The maximum is 
5,000,000,000 francs. But what is the use of limiting the issue 
of notes, if the bank can reduce its reserve to zero ? What 
guarantee is there for the public ? The sole guarantee con- 
sists in the prudence which a bank should exercise in order 
to maintain a proper ratio between the reserve and the circu- 
lation. (As a matter of fact, the reserve of the Bank of 
France is generally four-fifths, or at least two-thirds, of its 
circulation ; on one occasion the reserve was even equal to 
the circulation.) But in this case the legal limit might just 
as well be done away with. 

(4) The fourth plan is to compel banks to secure their note 
issues by means of reliable instruments of value. These instru- 
ments or securities are generally government bonds which 
are at least equal in value to the notes. 

This, as we have seen, is the system employed in the 
United States. Each bank receives notes to the amount of 
the par value of the bonds it has deposited in the Treasury. 
In ordinary periods of commercial life, this security is not 
necessary to assure the credit of a bank. In times of crises, 
however, that is to say at just the time when security is most 
needed, this plan is no longer sufficient. For in the event of 
a crisis all stock-exchange securities, including government 
bonds, are necessarily depreciated ; and if, in order to meet 
the demands of note-holders for payment in specie, the bonds 
of the banks are put on the market for sale, it would be a 
difficult matter to dispose of them for a sufficient amount. 2 

1 The maximum is of recent date. It was not given in the regulations of 
the bank, and, it may be said, was introduced by accident in the financial law 
of 1883. Previously it existed only in the case of forced circulation. Fixed 
at 3,500,000,000 francs in 1883, it was raised to 5,000,000,000 in 1897. 

2 Professor Gide evidently overlooks the fact that whenever the govern- 
ment bonds deposited by our national banks are depreciated, the Comptroller 
of the Currency may require additional security. (See page 411.) Many 
American economists, moreover, would be disposed to deny that the govern- 
ment bonds will ever depreciate to such an extent as to offer no sufficient 
sonirity for the redemption of notes. 



420 PRINCIPLES OF POLITICAL ECONOMY 

Bank notes in the United States are, in a word, simply 
government bonds chopped into pieces of circulating medium. 

The example of the United States shows that the maximum 
of governmental regulation is reached in the very country 
where banks of issue are most numerous. The example of 
France, on the other hand, shows the minimum of regulation 
under a system of monopoly. It is natural that this should 
be so, for monopoly is itself a guarantee of efficiency. 

We may say that, after all, no system thus far devised offers 
an absolute guarantee for the redemption of notes. The only 
sure method would be to require the banks always to keep a 
reserve equal not only to the amount of notes in circulation, 
but also to the sum total of their deposits. This, of course, 
would be an absolute guarantee ; but if it were adopted, the 
banks would no longer serve any purpose. They could no 
longer employ the floating capital of the nation, since they 
would be obliged to keep it unused in their vaults. Nor 
could they serve the purpose of economizing coin, since 
bank notes would merely represent coin. Banks would, in a 
word, no longer be institutions of credit. If we want to 
make use of credit, we must take the risks that accompany it. 
To seek to combine both the advantages of credit and those 
of strictly cash transactions is like seeking the square of the 
circle : the one excludes the other. 



BOOK IV. DISTRIBUTION 

PART I. THE VARIOUS SYSTEMS OF 
DISTRIBUTION 

CHAPTER I — THE PRESENT SYSTEM 

I. How the Distribution of Wealth is Effected 

If men did not produce collectively, but each for himself, 
independently, every one would also keep for himself that 
which he produced, and the question of distribution could 
not even arise. Under such a system, the rule suum cuique 
would naturally apply. But this system, in which there 
could of course be no exchange and no division of labor, 
would be entirely incompatible with any kind of social life/ 
Even among savages that live by hunting or fishing, the 
system of absolute economic independence is never entirely 
realized. And in present-day society what an extraordinary 
distribution of wealth would result if we should tell the 
baker who has produced a thousand loaves of bread, or the 
shoemaker who has made a hundred pairs of shoes that he 
had better keep them as his share of the social product. 

Professor Stanley Jevons has compared the productive 
process, in which so many elements are combined, to the 
kitchen where Macbeth's three witches, in preparing their 
infernal compound, throw into their cauldron the most 
heterogeneous substances. By what subtle analysis shall we 
succeed in distinguishing the share that each one has contrib- 
uted to the social product ? In all civilized societies each 
individual is constantly selling or buying goods, and selling 

421 



422 PRINCIPLES OF POLITICAL ECONOMY 

or employing services which are offered for sale, and thus 
ceaselessly influencing the amount and the nature of social 
wealth. Constantly wealth is being consumed or withdrawn 
from circulation ; constantly wealth is being produced and 
put in circulation. The whole question of distribution is 
to discover whether each person withdraws from the social 
product a value equivalent to that which he contributes. 

The classical economists answer this question affirmatively. 
They hold that in a society based on the liberty of labor and 
the absolute freedom of contract, (aside from those defects 
that are inseparable from all human institutions,) every 
one receives the just and exact equivalent of the wealth he 
creates. They admit that this is not entirely the case in our 
present industrial system ; but, they declare, the defects of 
the present system are due to protection, legal monopolies, 
and government interference of all sorts. 

The classical economists explain the distribution of wealth 
as follows : Each of us offers for sale the commodities he pos- 
sesses. The farmer offers the crop taken from his land, the 
manufacturer offers the products of his shop or factory, 1 and 
the man who owns neither land nor capital offers his muscu- 
lar strength or his intelligence. These products or services 
are sold at a price fixed on the market by the law of supply 
and demand ; which amounts to saying (if we recall the 
explanation of value given on page 64) that they are sold 
at a high or low price according to the intensity of the desire 
felt by the public for these goods or services. Hence the 
public, by the value which it attributes to our products or 
our services, and the price which it consents to pay for 
them, determines the share that each of us shall receive. 
This price, known as wages, or as salary, or as rent, or as 
selling-price for whatever commodity we offer, constitutes 
our income. 

1 It is perhaps unnecessary to point out that the expressions : his land, 
his factory, already imply the existence of private property, which, as -we 
shall see presently, itself requires justification. 



THE CLASSICAL IDEA OF DISTRIBUTION 423 

Is it not in conformity with social utility and even with 
justice that the goods which are most desired and which are 
most rare, i.e. which satisfy the most pressing wants of society 
and which are not sufficient in quantity entirely to. satisfy 
these wants, should possess the greatest value ? Does not the 
law of demand and supply, which regulates this value, secure 
to each person the equivalent of the product that he has made 
or the service that he has rendered ? And is not this equiv- 
alent value measured in the most impartial and the least 
arbitrary manner by exchange in the open market, i.e. by 
means of free contract ? Does not the public, by paying a 
high price for my products and a low price for yours, thus 
indicate the degree of importance or of social utility which 
it ascribes to our respective products or labors ? One may 
object that the public is not a competent judge of this 
importance and utility. But who, then, could possibly be a 
better judge than the person who consumes our products or 
employs our services ? 

The classical economists point out, moreover, that compe- 
tition always tends to correct any inequalities or injustices 
that may arise. For if it should happen that my products 
or my services bring an excessive price and great profits, a 
horde of rivals who are eager to make similar excessive 
profits will immediately engage in the same industry or pro- 
fession as mine, and will soon, by increasing the supply of 
these products or services, reduce their value to the level of 
the cost of production. Thus the value of every commodity 
tends to be regulated by the trouble and expense necessary 
to produce it. Could any better rule than this be devised 
to determine distribution ? 

II. Why this System of Distribution does not seem Just 

Such is the classical explanation and justification of the 
present distributive process. As a scientific explanation of 
what takes place, it is good. But as a justification, it is 



424 PRINCIPLES OF POLITICAL ECONOMY 

poor ; and as such, it is in fact not wholly devoid of irony. 
Take, for example, a miner who gets $2 a day or 25 cents an 
hour to extract coal ; consider, on the other hand, a celebrated 
pianist like Paderewski, who receives as much as $2500 for 
playing two or three selections at a concert. If we ask 
why the musician is paid ten thousand times as much as 
the workman, the disciples of Bastiat would unhesitatingly 
reply : " Because the former renders society a service ten 
thousand times greater than the latter ; and the proof of 
this is that society is willing to pay ten thousand times as 
much for it. Society may be mistaken, but we cannot esti- 
mate the value of services except by the price that society 
attributes to them. " 1 

If this be true, we must admit that the products, services, 
and labors that are most useful to mankind, ■ — from the work 
of the humblest manual laborer up to that of some inventive 
genius who probably died of hunger, — may possess almost 
no exchange value. On the other hand, such labors or such 
acts (for often they do not deserve the name of labor) as 
provide the most fugitive or perhaps the most immoral pleas- 
ures may be purchased at extravagant prices, and make the 
fortunes of those that sell them. It must furthermore be 
admitted that all this is the inevitable and natural conse- 
quence of the law of value as we have explained it. But we 
must hasten to add that inasmuch as the law of value is a 
natural law, it is also unmoral ; that is to say, it has nothing 
to do with the question of justice or injustice and is as little 
concerned with moral principles as any other natural law. 
The law of value is in this respect like the law of gravita- 
tion, or like the law that " maketh the sun to rise on the evil 
and on the good, and sendeth rain on the just and on the 
unjust." 2 

1 In this connection we are reminded of the reply that a well-known singer 
once made to the Empress Catherine when the latter complained that the 
artist asked for higher pay than that of a Russian Marshal. "Very well 
then," retorted the singer, "get your marshal to sing for you." 

2 The writer of the Dutch translation of this book, Mr. Herckenrath, re- 






FKEE COMPETITION PARTLY HYPOTHETICAL 425 

When an English lord owning large sections of London 
permits contractors to build houses on his land on condition 
that they shall pay a ground rent, which is raised at each 
renewal of the lease because of the increased value of land 
and of houses, we may readily admit that his remuneration, 
which amounts perhaps to millions, is naturally determined 
by the law of supply and demand. But we cannot readily 
see in what respect this remuneration is proportionate to the 
"service rendered" by the "landlord." Or, if some one 
should insist upon designating as a service the fact of having 
given permission to people to reside in the centre of London, 
it is difficult to perceive by virtue of what principle of justice 
or social usefulness the noble lord has been invested with 
the agreeable privilege of rendering his fellow-mortals a ser- 
vice that is so dearly paid. 

Finally, as regards the classical hypothesis of a regime of 
absolute liberty, in which competition acts as a corrective and 
constantly keeps the price of things at the level of the cost 
of production, we must declare that this hypothesis never 
holds true entirely. The law of free competition never 
operates fully or perfectly. The examples that we have 
given above are, to be sure, cases of monopolies ; but they 
are by no means exceptional. Almost all large fortunes owe 
their origin to some element of actual monopoly, or, to speak 
with more exactitude, some element of rent. We shall note 
later on that the name rent is applied to those cases in which, 
because of some element of inequality in the conditions of 
production, the law of competition does not produce its nor- 
mal effect of bringing exchange value to the level of the cost 
of production. Now the cases of rent, which economists 

marks that these injustices of the law of value are due particularly to the 
fact that our appreciations or estimates of value are unjust, and that the 
progress of the moral education of mankind may change these appreciations 
and make them conform more closely to the idea of justice. This is quite 
possible. We have not said that the law of value is immoral, but that it is 
unmoral. If all men should become just and righteous, the law of values 
would also be just and righteous. 



426 PRINCIPLES OF POLITICAL ECONOMY 

formerly regarded as confined to the revenue due to differ- 
ences in the fertility and accessibility of land, are to-day 
conceded to extend to almost every kind of income. 

But although we abandon the optimistic doctrine that 
regards the present distribution of wealth as in perfect har- 
mony with our ideals of justice, we must nevertheless admit 
that the present method of distribution, founded on free 
competition and the law of demand and supply, accomplishes 
fairly well two things which are of capital importance, and 
without which we could scarcely get along : — 

First, it stimulates productive activity. The amazing ac- 
cumulation of wealth that marks our own epoch is sufficient 
to convince us of this. Theoretically, moreover, what better 
method could be conceived for raising individual activity to 
a maximum than to say to everybody: " Do whatever you 
can or whatever you wish. What you produce will belong 
to you. Try to make the best use of it. If your share of 
the social product is large, so much the better for you ; if it 
is small, so much the worse." 1 

Perhaps it may even be said that the present economic 
system offers too great a stimulus to the pursuit of wealth, 
and that from the ethical point of view it might be desirable 
to substitute a less intensely stimulating economic regime. 
(See page 114.) But we must not overlook the fact that 
even in the wealthiest of our modern societies, an equal 
division of wealth would mean only a small share for each 
member of society. It would therefore be imprudent or at 
least untimely to adopt a system of distribution that would 
curtail production. What would be the good of distributing 
wealth more equally, if all men were thus made poorer than 
they are now ? 

Secondly, it violates no one's right of free initiative. The 

1 Socialists do not deny that the present "capitalistic" system has in- 
creased our productive energies enormously. They even emphasize the fact 
that this system will perish precisely because of so-called overproduction. 



PRESENT DISTRIBUTION IS SPONTANEOUS 427 

distributive process, founded on free competition and on the 
law of demand and supply, does not call for the intervention 
of a distributive authority ; the legislator is not asked to 
make the division of wealth, since everybody determines his 
own share by creating it. If the government must intervene, 
it should be only to check any possible disturbances of the 
economic mechanism, not to put it in motion. The economic 
forces, as we have explained, are adjusted automatically, 
spontaneously. This is a great superiority, which no other 
system appears to possess, not even those that are theoreti- 
cally perfect. Admitting for a moment that we might dis- 
cover the ideal rule of distributive justice, could this ideal 
rule be made to operate of itself and by its own agency ? 
Would it not require the intervention of some authority to 
apply it and to give to each participant in production his 
share of the proceeds, just as a mother gives each of her 
children a piece of pie as large as each of them deserves ? 
Would not the authoritative regulation of distribution neces- 
sarily involve the regulation of production and labor also ? 
If the authority charged with the task of distribution meas- 
ured out every one's share of the social product when the day 
of reckoning comes, could it during the rest of the time 
let everybody work or loaf at his own pleasure ? It must 
be admitted that this is extremely unlikely. 1 

It must not be forgotten, moreover, that although justice 
is very precious, nay, inestimable, — fiat justitia, ruat eoelum ! 
— yet there are other very precious and noble things; and 
one of these is liberty. It would be too dear a price to pay 

1 It is true that under the present system the right of free initiative, though 
granted by law to all, really exists only for those who possess capital. The 
wage-worker, who is a mere "private" in the ranks of the industrial army, 
has little initiative or choice. Nevertheless, for a minority that is increasing 
and whose numbers we may hope will still further increase, this free initiative 
does exist in various degrees at the present time. Is it likely that any system 
of socialism or collectivism would secure liberty and free initiative to a greater 
number ? Would socialism not be likely to withdraw it from the minority 
that now enjoy it ? 



428 PRINCIPLES OF POLITICAL ECONOMY 

for a more equitable distribution if we were obliged to sacri- 
fice liberty to obtain it. Indeed, of what use would a better 
distribution be, if men could secure it only under a system 
of quasi-slavery ? 

The problem may therefore be expressed in these terms: 
How shall we apply principles of justice to the distribution 
of wealth without curtailing production and without sacri- 
ficing (but rather by develojDing) individual initiative and 
liberty? To accomplish this is certainly not impossible. 
Whatever the present state of this world of ours may be, 
and whatever defects we may discover in it, it at least does 
not possess the defect of being unchangeable ; it is con- 
stantly being transformed, and no one with an unbiassed 
judgment can maintain that it is changing for the worse. 

III. The Origin of the Right of Property 

In civilized societies the right of individual or private 
property is the mainspring of the whole mechanism of distri- 
bution. It sets all in motion. But it is also the point of 
attack for all schools of socialism. We are therefore led to 
ask : What is the right of private property ? 

The classical economists, and even Pope Leo XIII, in his 
encyclical letter entitled De conditione opificum, define it as a 
man's right to the product of his own toil. Hence they 
regard it as realizing the formula, "each shall receive the 
product of his labor," or, at least, " each shall receive the 
value produced by his labor." Man would thus be the owner 
of all things created by his own activity, and his posses- 
sions would, in a sense, be the legitimate extension of his 
own personality. But the man who should attempt to make 
a practical application of this formula would be singularly 
disappointed. Let us, for example, make an inventory of a 
man's possessions, and question him with regard to the 
source of his property : " Is this house the product of your 
labor?" The answer would probably be, "No; it came to 



OCCUPANCY UNDERLIES PRIVATE PROPERTY 429 

me from my parents." — "Did your labor produce this forest 
and these fields ? " " No ; they are not the product of any 
one's labor." — " Are these goods which fill your storehouses, 
or these crops in your barn, the product of your labor ? " 
"No; they were produced by my employees." If all this 
be true, what, then, is the use of the definition given above? 

Lawyers have been more accurate and more cautious. 
They define the right of private property simply by its attri- 
butes, without attempting to justify it. They regard it as 
the right exerted over a thing by one person to the exclusion 
of every one else. The usual definition of property is to 
the effect that it confers the possession, use, disposal, and 
enjoyment of a thing. There is no mention of labor in these 
definitions, and, from the legal point of view, this omission 
is perfectly logical. In antiquity, labor could not possibly 
have been regarded as a method of acquiring property, be- 
cause labor was almost entirely slave labor. Even to-day, 
labor of itself involves only the acquisition of wages, not of 
property. The laborer can obtain property only indirectly ; 
that is, by purchasing it with his wages. 

In most legal systems, occupancy ordinarily is regarded as 
the primary fact underlying the right of property. This 
is, in fact, the truth; for, as has been well said, "appro- 
priation precedes production, both historically and logically. 
Primitive races regarded, and often now regard, appropriation 
as the best title to property. . . . Priority of appropria- 
tion is the only title of right which can supersede the title 
of greater force." 1 Nevertheless, as occupancy figures only 
at the origin of property, and as it is not possible, in the veri- 

1 W. G. Sumner, "What the Social Classes owe to Each Other," page 68. 
Concerning this same matter, President Hadley says, in his "Economics" : 
" The earliest property rights were based on occupancy rather than on labor. 
They were a recognition of the power of the strong man to retain what 
he had seized, not of the right of the industrious man to enjoy what he had 
produced. "We may fairly grant the claim of the socialist, that capital origi- 
nated in robbery. In like manner, labor originated in slavery." 

In antique societies occupancy was itself founded on conquest. The type 



430 PRINCIPLES OF POLITICAL ECONOMY 

fication of property claims, to go back to the beginning, it 
may be said that property is usually based on prescription, 
i.e. on immemorial or long-continued and uninterrupted 
possession. But prescription, like simple occupancy, is only 
actual possession, and is devoid of any justificative ethical 
value. 

We must therefore simply regard private property as a 
historical fact. We shall most easily discover its nature by 
considering its attributes, and the objects which may become 
private property. 

The present organization of society cannot be regarded as 
the logical development of an a priori principle. It is a 
product of history, the culmination of a series of very 
complex facts, of which some are more or less in accord- 
ance with, and others more or less contrary to, our idea of 
abstract justice. There is, at the basis of private property 
as at present constituted, an almost hopeless entanglement 
of occupation and conquest, customs and laws, labor and 
saving. 1 

IV. The Evolution of the Right of Property, with Regard 

to its Object 

At the present time all wealth that can be appropriated — 
which excludes the air, the sea, running waters — may 
become the object of private property rights. In civilized 
communities almost all wealth constitutes some one's private 
property. This, however, has not always been the case. 
There was a time when the scope of private property was 
confined to a few objects. There is no doubt that at first it 
comprised only those kinds of wealth that in civilized coun- 

of quiritarian property at Rome was that which had been acquired sub hasta, 
i.e. by the lance. 

1 The extremely close relation between law, especially the law of property 
and economic organization, has been emphasized by Karl Marx and most 
scientifically studied by Rodbertus and by Professor Adolf Wagner, of the 
University of Berlin. (See the latter's " Grundlegung der politischen 02kono- 
mie," zweiter Theil.) 



THE THINGS THAT WERE PROPERTY 431 

tries have long ago ceased to be the object of property 
rights, namely, slaves and women. It also included objects 
of immediate personal use, — such as jewels, weapons, horses, 
— the individual ownership of which was evidenced by the 
custom of burying them with their owner in his tomb ; in- 
deed, slaves and women were often treated similarly. 

Later, property came to include the home, — not as in- 
dividual property, but as family property, — because the 
home was the abiding-place of the household gods, and these 
gods belonged to the family. 1 Still later, it extended to a 
portion of the land, and first of all to the land in which the 
ancestors were buried (because the ancestors were also a kind 
of family property). But, despite these beginnings, private 
property in land — the most important and almost the sole 
wealth of the ancients — was established very gradually. 2 
When we take up the study of land-rent we shall see how land 
in turn came to be regarded as an object of the right of prop- 
erty. In fact, even now, not all land has been appropriated ; 
unowned areas are at the present time being brought under 
the dominion of property rights by way of colonization, oc- 
cupancy, and preparation for cultivation. But the time is 
not far distant when private property will extend over the 
whole earth, and to all objects that are capable of being 
appropriated. 

Different kinds of property have successively played a domi- 
nant part in the history of mankind. Among pastoral tribes, 
cattle is the most important property ; under feudalism, 
land ; and in the era of steam, coal mines. Private property 

1 Consult Coulanges, " The Ancient City." 

2 (t private possession, beginning with movables, extends itself to immova- 
bles only under certain conditions. We have evidence of this in the fact 
named by Mayer that the Hebrew language has no expression for landed 
property ; and again in the fact alleged by Mommsen of the Romans that 
the idea of property was primarily associated not with immovable estate but 
with estate in slaves and cattle (familia pecunia que). 1,1 — Herbert Spen- 
cer, "Sociology," Part V. The word mancipatio evidently presupposed 
some movable object. 



432 PRINCIPLES OF POLITICAL ECONOMY 

has, in our own times, been extended to a multitude of new 
objects of which our ancestors knew nothing. Among these 
are : (1) So-called invisible property; that is, credit claims or 
shares in the stock of industrial enterprises, represented by 
mere pieces of paper that can be slipped into a pocket-book, 
and which to-day constitute a most convenient and desirable 
kind of wealth ; (2) works of literature, science, and art, 
which have become the object of property under the name 
of copyrights and patents. 

It is possible that in the future individual property will 
adopt forms and be applied to objects and relations of which 
we have to-day little or no conception. 1 

V. The Evolution of the Right of Property, with Regard 

to its Attributes 

The right of property has two characteristic attributes : 
perpetuity and free disposal. Deprived of one or the other 
of these characteristics, it becomes only the right of posses- 
sion or the right of usufruct. 

The perpetuity of a property right evidentty means that 
the right shall last as long as the object to which it extends. 
As it lies in the nature of property to attach to some con- 
crete object, its duration is measured by that of the ob- 
ject itself, and not by that of the proprietor. There are 
many things which cannot last long and which are intended 
to be consumed almost immediately; for such objects as 
these, the right of ownership will be ephemeral. But there 
are also objects of long duration, and there is one kind of 
wealth, — land, — the duration of which has no limits save 
those fixed by geological conditions. Hence, the right of 
property in land is sui generis, and involves economic conse- 
quences that are, as we shall presently see, of capital im- 

*A law was recently passed by the state of Connecticut, entitled "An 
Act to prevent the stealing of electricity." Our present copyright laws are 
practically laws against stealing ideas. 



PERPETUITY AND INHEPITABILITY 433 

portance. There are, however, other objects which, by means 
of legal ingenuity, have acquired a quasi-perpetuity ; examples 
of these are so-called " perpetual government loans." 

Inseparably connected with the perpetuity of the right of 
property is the right of legacy or inheritance ; for when the 
owner dies and the object continues to exist, there must be 
some one to take his place as master of it. As long, of course, 
as property is vested in the family there can be no inter- 
ruption or break in its ownership; for the family consti- 
tutes a moral person whose existence is perpetual, precisely 
like the modern " corporation," which is said to be " im- 
mortal." When, in the early history of law, the property of 
the family passed apparently from the father to the children, 
this was by right of continuation and not by right of succession 
properly speaking. When men began to regard property as 
individual, its transfer to the children of the deceased was 
expressly provided for by law and was made obligatory upon 
the parents and sometimes upon the children. 1 This was 
merely a somewhat altered form of family property; often 
the property was legally transferred to the nearest relatives 
by so-called inheritance ah intestato. 

From the view-point of the distribution of wealth, the per- 
petuity and inheritability of property result in the owner- 
ship of wealth by persons who have not produced it, — wealth 
which must be regarded as the product of the labor of their 
ancestors in a more or less obscure past. Thus the optimistic 
principle that everybody gets the exact equivalent of the 
product of his own labor is of questionable validity. 

The other essential attribute of the right of private prop- 
erty is, as we have said, the right of free disposal. Roman 
law put this forcibly by defining the right of property as 
the jus utendi, fruendi, et abutendi ; the French Civil Code 
defines it as " the right to enjoy and to dispose of things in the 

1 Even when the right of succession ab intestat had been established at 
Eome, the members of the owner's family, who were called upon to assume 
ownership, were designated as heredes necessarii (obligatory heirs). 



434 PRINCIPLES OF POLITICAL ECONOMY 

most absolute manner." But this right to dispose of a thing 
ds one pleases, which confers upon ownership an absolute 
character so inherent that we can scarcely conceive of own- 
ership without it, did not always exist. Ownership has 
gradually been widened in its connotation, and in this respect 
has undergone the same evolution as the objects of property. 
From the legal point of view, the claim of the Romans to 
glory consists in having first given the right of property 
this sovereign attribute ; it was subsequently somewhat at- 
tenuated, under the influence of Germanic laws, and again 
introduced into those systems of modern law which were 
influenced by the French Revolution. 

So far as we can conjecture, the order in which the right 
of private property successively acquired its essential attri- 
butes was as follows : — 

(1) Probably the first property right was that of exploiting 
one's possessions, that is, making them yield something for 
the owner by means of the labor of others, — formerly by the 
labor of slaves, and subsequently by the labor of free wage- 
workers (employees). This was originally the noble attribute 
of property, inasmuch as it dispensed with the owner's need 
to work. 

(2) The right of gift, at least in the case of movable 
objects, seems to have been one of the oldest ways of making 
use of wealth and anterior even to the right to sell. (See 
page 184.) And, indeed, if the owner has the right to consume 
a thing for his own gratification, why should he not have the 
right to let another person consume it ? If he possesses the 
right to destroy it, why should he not be permitted to give it 
away ? Is not the noblest and most enviable privilege con- 
nected with ownership the right to confer its benefits on 
others ? 

(3) The rights to sell and to rent seem to have sprung 
up much later. In the fourth century before Christ, Aris- 
totle declared that these were necessary attributes of the 
right of property ; but he does not seem to imply that they 



SALE NOT ALLOWED ORIGINALLY 435 

were generally recognized at that time. In fact, there are 
many reasons why they should not have been recognized. As 
long as property was vested in the family and bore the imprint 
of religious consecration — and this was the marked character- 
istic of antique property — the transfer of ownership was not 
sanctioned; at all events, it constituted an act of impiety on 
the part of any member of the family. Moreover, exchange 
and the division of labor did not yet exist ; each family 
sufficed unto itself; movable objects of property were few in 
number. Hence every one kept these objects permanently ; 
sometimes they were buried with the owner. Under these 
circumstances, sale could be regarded only as an exceptional 
and abnormal act. Accordingly, when sale is first intro- 
duced, we find it solemnized by extraordinary ceremonies, 
and partaking of the nature of a public event. By the law of 
Rome, mancipatio (the transfer of property), had to take place 
in the presence of five witnesses representing the five classes 
of the Roman people. 1 

(4) The right to bequeath, which has always been regarded 
as the most important attribute and the crowning feature of 
the right of property, (because it prolongs this right beyond 
death), was even slower in becoming a part of the right of 
property. 2 This right, moreover, came into conflict with the 
right of family inheritability to which we have already re- 
ferred ; and it obviously could not have been- recognized until 
^property had entirely lost its family character and become 
thoroughly individual. There is reason to believe that even 
at Rome, where individual property was ultimately so vigor- 
ously developed, the father of the family did not have the 

1 The same is true in Germanic law. The Ripuarians in the sixth century- 
required that sales take place in mallo, i.e. in the assembly of the people. 

2 " The right freely to bequeath indicates the greatest scope ever accorded 
to individuals in the history of civilization." — Maine, "Ancient Law.". 

Many modern systems of law provide that the father cannot disinherit 
certain relatives — especially the wife and children. This is, of course, an in- 
fringement on the right of absolutely free disposal, and is evidently another 
trace of the old family conception of property. 



436 PRINCIPLES OF POLITICAL ECONOMY 

right to bequeath until the establishment of the Law of the 
Twelve Tables (450 b.c). 1 The solemnity which accompanied 
the act of bequest clearly indicates that it was not an every- 
day performance. 

When the right of property has acquired these four charac- 
teristics, it may be regarded as complete, and then it con- 
stitutes the very basis of distribution. 

Inheritability, gift, and legacy, taken together, make it 
possible to possess wealth without having performed any 
labor. They facilitate its transmission to those who have 
not worked for it. On the other hand, the right of property 
creates a class of " disinherited." In the course of time, and 
as the result of accumulation by inheritance, it increases the 
economic inequalities among men. 

The power to lend, to lease, or to rent property, gives rise 
to a division of society into two classes — creditors and 
debtors — whose conflicting interests are a menace to social 
peace and order. It results in the creation of a new way 
to live without working, viz. living on an " independent 
income." 

The right to utilize property exploitatively, i.e. to employ 
other persons, gives rise to another division of society into 
two classes : that of wage-workers, who labor in the service 
of others, and that of employers, who, in appearance at least, 
appropriate part of that which is produced by the laborers in 
their employ. Thus the right of private property insidiously 
prepares the way for the conflict between labor and capital. 

The right to sell, finally, transforms the ownership of the 
product into the ownership of the value of the product. (See 
page 184.) This attribute of private property subjects it to 
all the fluctuations of demand and supply, all the unfortunate 
or fortunate whims and fancies of public taste and fashion, 
all the contingencies of the market ; property, in a word, 

1 According to De Coulanges, the right to choose heirs dates, in Athens, 
from the time of Solon (sixth century b.c), and in Sparta only from the 
beginning of the fourth century before Christ. 



THE INEQUALITY OF WEALTH 437 

acquires that conditional, instable, doubtful form which char- 
acterizes wealth in modern society. (See page 47.) 

Three of these effects of the right of private property 
appear particularly objectionable from the standpoint of 
social justice. The first is the extreme inequality of wealth. 
The second is the right to be idle; this right is possessed 
only by the favored few, and is a consequence of inheritance 
and independent income. The third is pauperism. Let us 
examine these three objectionable consequences of the right 
of private property. 

VI. The Inequality of Wealth 

The inequality of wealth has always given rise to bitter 
complaint. The quarrel between rich and poor is as old as 
the world, and has given rise to the problems of socialism. 
Without doubt this state of affairs is due partly to an un- 
worthy feeling of envy, which is natural to man, and which 
makes him impatient of superiority in his fellow-creatures, 
whether that superiority be one of talent, character, beauty, 
intelligence, or even of health or virtue. If, however, there 
were only this element in class hatred, it would be reasonable 
to hope that some day education and moral progress would 
ultimately destroy it. But it has a deeper foundation than 
the foolish sentiment of envy; namely, the feeling of violated 
justice. This feeling, moreover, deepens and increases with 
our growing knowledge of moral laws. 

Numerous attempts have been made to reach a statistical 
statement of the inequality of wealth and of incomes. Mr. 
Thomas G. Shearman 1 estimates that in the United States 
1.4 of the population own 70 per cent of the wealth; 9.2 
per cent of the population own 12 per cent of the wealth, 
and 89.4 per cent of the population own only 18 per cent 
of the wealth. 

Somewhat more official is the estimate of Mr. G. K. 

1 In the Forum for 1889 and 1891. 



438 PRINCIPLES OF POLITICAL ECONOMY 

Holmes, expert on wealth statistics for the Tenth Census. 
Mr. Holmes found that 0.3 per cent of the people own 20 
per cent of the wealth; 8.97 per cent of the people own 51 
per cent of the wealth, and 91 per cent of the people own 
only 29 per cent of the wealth. 1 

Another authority, Dr. C. B. Spahr, 2 reaches the conclu- 
sion that, whereas less than half the families in America are 
propertyless, seven-eighths of the families hold but one-eighth 
of the national wealth, and one per cent of the families hold 
more than all the rest. 

The state of affairs in Great Britain is, according to the 
same writer, even worse from the viewpoint of an equal dis- 
tribution of wealth. There, the number of property-owning 
families is about one-third less than the number of property- 
owners. There remain nearly 6,000,000 families, or more 
than three-fourths of the people of Great Britain and 
Ireland, without any registered property whatever. They 
have, indeed, their household goods, but the total value of 
these can hardly exceed $500,000,000. Less than 2 per cent 
of the families of the United Kingdom hold about three 
times as much private property as all the remainder ; and 93 
per cent of the people hold less than 8 per cent of the 
accumulated wealth. 

The following circumstances appear to justify the feeling 
that social justice is violated : — 

(1) The present inequalities of wealth do not appear to be 
natural, but artificial. Unlike physical, mental, and moral 
inequalities, differences of wealth do not seem to be gifts of 
nature that we cannot change for better or for worse, but 
the unforeseen result of a specific social organization and of 
economic institutions (such as property and inheritance) 
established and maintained by certain social classes. 

This opinion is well founded as far as antique societies are 

1 Political Science Quarterly and Journal of the Royal Statistical Society. 

2 "The Present Distribution of Wealth in the United States," New York, 
1896. 



NATUKAL INEQUALITIES 439 

concerned, and is still valid with regard to some modern 
nations, — England, for example. In that country the law 
(and one may even say brute force) originally placed half 
the soil of the British Isles in the hands of a few hundred 
families, and forcibly keeps this property in the same hands 
by transferring it de jure to the oldest son, who is not allowed 
to sell or to mortgage his estate, and who is obliged (if need 
be, in spite of himself) to retain a privileged social posi- 
tion whence he may not descend and to which others are not 
permitted to rise. 

But it is not true in democratic countries like France, 
Switzerland, and the United States. It cannot be said in 
these countries that the wealthy are made rich solely by the 
laws. It would, to be sure, be absurd to go to the other 
extreme and declare, as Franklin did, that they owe their 
wealth to no other source than "labor and economy." But 
it must be admitted, as a general rule, that the men who lay 
the foundations of large fortunes possess certain exceptional 
qualities ; these uncommon qualities are not necessarily 
moral, but those which insure victory in the struggle for life. 

Only, while admitting that inequalities of wealth are gen- 
erally allied with natural inequalities, we must recognize 
that the former are infinitely greater than the latter. Here, 
let us say, is a man who is " worth," as the popular expression 
puts it, 1200,000,000 ; that is to say, at least 20,000 times as 
much as the most expert workman. Now no one will believe, 
not even the millionnaire himself, that he is 20,000 times as 
capable as the workman. If there were some device for 
measuring the moral and intellectual abilities of men, it 
would doubtless be easy to ascertain that these abilities are 
not commensurate with the inequalities of riches, but are 
often entirely different from them in degree. There is no 
question that great wealth is frequently found closely allied 
with the possession of certain qualities of initiative, audacity, 
and perseverance, — the qualities that lead to triumph in 
worldly matters, — and often with what may be called good 



440 PRINCIPLES OF POLITICAL ECONOMY 

luck ; but, at all events, this wealth is by no means pro- 
portionate to the "painstaking," that is, to the conscious 
productive effort, of the owner. On the contrary, it would 
appear, as John Stuart Mill has remarked somewhat bitterly, 
that the reward declines as the labor becomes more painful, 
until it reaches a point where the hardest work scarcely sup- 
plies the bare needs of existence. Still less do these ine- 
qualities seem proportionate to the merits or virtues of men. 
The contrast between the poor honest man and the wicked 
but happy rich man is a commonplace that dates back to the 
time of Job, but is as striking to-day as ever. 

(2) Natural inequalities harm no one. Intelligence and 
beauty are, in those that }30ssess them, not attributes of 
which others have been deprived ; nor does their possession 
by the few make others either stupider or uglier. It is held, 
on the other hand, that the tvealth of the rich is created by 
'plundering the poor. The whole effort of modern socialism 
is directed toward the demonstration of this thesis. 

We do not, however, regard it as well founded. To be 
sure, we cannot deny that all great fortunes are created by 
taking a part of the proceeds of the labor of others. But we 
shall see presently that this appropriation is not necessarily 
robbery. Although too many fortunes are based on robbery, 
there are less of them now than in antique societies, when 
the conquest of land and the custom of slave labor — two 
aspects of robbery — were regarded as the normal source 
of all riches. 

But it is nevertheless true that economic inequalities are 
much more pronounced than natural inequalities, and their 
social consequences more far-reaching for good or for evil. 
Economic inequalities involve a whole series of other ine- 
qualities, which make us feel them more keenly and which 
greatly increase their importance ; they ultimately constitute 
the dominating influence in the physical, political, intellec- 
tual, artistic, religious, and moral life of society. 

Statistics show that the average duration of life is twice 



THE ADVANTAGES OF WEALTH 441 

as great among the rich classes as among the poor and that, 
by a cruel irony of fate, the poorer a man is, the greater is 
the tribute that he must pay to disease and death. 1 Nor 
is this the worst result of poverty. The poorer a man is, the 
greater the temptation to vice and criminality. Statistics 
show that the criminality of the poorer classes is greater than 
that of the well-to-do. Modern science has entirely exploded 
the old saw that poverty goes hand in hand with health and 
virtue. The poor no longer have even this consolation ! 

Wealth provides its fortunate possessors not only with 
gratification of all kinds, (that would be a matter of rela- 
tively small importance,) not only with longer life, health, 
independence, leisure, and refinement (which are all very 
important), but with great power in all the fields of human 
interest and activity. "Plutocracy" is nothing new; but it 

1 Professor Leroy-Beaulieu, in his book on " La Repartition des Richesses," 
attempts to develop a contrast, a sort of compensation, between the evils 
that result from indigence and those due to disease or moral suffering : 
" What is the number of indigents when compared with that of the number 
of human beings who suffer from physical infirmities, and incurable or 
organic diseases like scrofula and consumption ? What, above all, is their 
number when compared with the still greater number of persons who are 
tormented by poignant mental suffering ? Indigence is certainly an evil, but 
for the thoughtful mind it is one of the lightest and least general evils that 
afflict civilized society." The eminent economist forgets that poverty is 
itself a cause of "poignant mental suffering," and a very important cause of 
" scrofula and consumption." Fate has not placed these two classes of evils 
that afflict mankind in opposite sides of the balance, but, on the contrary, 
appears to have placed them on the same side. The poor quarters of our 
cities contain a much larger proportion of consumptives than the wealthy 
districts. The laborers' sections of Paris, for instance, have ten times as 
many consumptives as the quarter of the Chainps-Elysdes. 

Numerous statistical calculations made in England indicate that the aver- 
age duration of life among the rich classes is between 55 and 56 years, whereas 
for the working classes it is as low as 28 years. In Paris the general mor- 
tality in the rich quarters of the Champs-Elyse'es is 10 per thousand, 
and in the Montparnasse quarter it is 43 per thousand. In London the 
figures are still worse: the Board of Health reports that the mortality varies 
from 11.3 per cent in the rich residences to 50 per cent in the homes of the 
very poor. 



442 PBLNCIPLES OF POLITICAL ECONOMY 

seems that the dynasties of our so-called " steel kings," " cotton 
kings," and " coal barons " tend to gain possession of a power 
greater than that which in former times was due to nobility 
or courage, or that which in modern times is possessed by 
men of learning or of genius. 

In the domain of social, political, and moral influence, 
the extraordinary effects of the possession of a large amount 
of money appear so entirely incommensurate as to be ex- 
tremely objectionable. 

(3) Finally, this inequality of wealth becomes more 
unbearable when we consider that all the other inequali- 
ties which formerly separated men are gradually being 
abolished. Civil equality has been established by law , uni- 
versal suffrage means political equality ; the wider diffusion 
of education tends even to establish a kind of intellectual 
equality. Only the inequality of wealth remains. Whereas 
this inequality was formerly disguised, so to speak, by other 
inequalities of a higher order, to-day it stands alone, sharply 
defined, and naturally arouses widespread antagonism. 

An investigation of these three objections does not lead 
to the conclusion that all inequality of wealth should be 
abolished. For, in the first place, it would be impossible to do 
this, at least until we succeed in suppressing those natural 
and innate differences between individuals of which the 
inequalities of wealth are simply the incommensurate con- 
sequences. Nor, in the second place, does it seem desirable 
to do away with the inequality of wealth, at least until human 
societies have entirely traversed the progressive and experi- 
mental phase of their development. Economic inequality 
acts as an incomparable stimulus to production. It keeps 
all men on the alert, from the bottom to the top of the social 
ladder, by offering the prospect of gradual advancement. 
It gives individual initiative the greatest possible scope by 
permitting the concentration of enormous capital in the 
hands of those who are capable of using it to the best ad van- 



EFFECTS OF ECONOMIC INEQUALITY 443 

tage. It gives rise to an abundant variety of human activi- 
ties, and the widest conceivable range of wants and desires. 
Men desire wealth ardently, not so much because of the 
pleasures as of the power which it procures. And power 
involves inequality. 

But in order that the inequality of wealth shall satisfy the 
above conditions, it must as far as possible be proportion- 
ate to the values created by its owners, or to the services 
rendered to society. The ultimate aim of all social reform 
is to achieve a closer relation, a parallelism, between riches 
and productivity or social service. 

The logical consequence of this condition seems to be that 
wealth must not be inheritable, for if it is, it is not the 
recompense of personal effort. But it should be noted that 
although the inheritability of wealth does not stimulate 
the labor of the children, it does stimulate that of the 
parents. At all events, there is nothing sui generis about 
the inheritability of economic inequality, inasmuch as natural 
inequalities, — health or disease, strength or weakness, beauty 
or homeliness, often talent or stupidity, and, in all cases, the 
family name, which is frequently a help or a hindrance in 
itself, — are also transmitted by heredity. We shall have 
occasion to refer again to this point. 

Yet we are perfectly willing to admit that perpetual ine- 
qualities are extremely unfortunate, because they create class 
distinctions. They discourage those who are placed low in 
the social ladder, by depriving them of all opportunity to 
rise ; and they conduce to inactivity among the wealthy be- 
cause wealth induces a feeling of permanent security in those 
that possess it. Great permanent differences of wealth break 
the ties of social solidarity, and create a chasm between 
Lazarus and Dives across which no bridge can be built. 
Those that are poor cease to work, because it seems useless ; 
those that are too rich abandon all productive effort because 
they no longer need to work. These economic extremes en- 
gender two evils which have afflicted society so long, — indo- 



444 PRINCIPLES OF POLITICAL ECONOMY 

lence and pauperism, — both of which lead to unproductive 
consumption. By creating, at the top and at the bottom of 
the social ladder, two classes of social parasites, extreme 
inequality works precisely contrary to natural selection, the 
beneficent effects of which are so often glorified by optimistic 
economists. 

But differences of wealth are unlikely to have this endur- 
ing character except in communities where they are defended 
and aggravated by the laws, — as, for example, in England. 
In democratic communities, inherited fortunes do not usually 
remain long in the possession of incapable persons. 

VII. The Right to be Idle 

In all societies, savage as well as civilized, — and especially 
in the former, all statements to the contrary notwithstand- 
ing, — there are persons, usually a minority, who do noth- 
ing. But although they do not work, this does not hinder 
them from living, or even from living very comfortably. 
Ordinarily, it is among people of this class that we find the 
largest incomes. Not only are these incomes often larger 
than those due to labor, but they possess the great advantage 
of being more regular. In all kinds of weather, and no 
matter whether the recipient is in good health or not, no 
matter whether he is young or old, no matter whether he 
stays at home or spends his time and money travelling round 
the world, his income always reaches him. When a man 
possesses this advantage he is said to " live on an independ- 
ent income," that is to say, his income is assured and he 
need not pay any attention to the problem of earning a 
livelihood. The possession of an independent income assures 
two privileges which are superior to all the enjoyments that 
wealth of other kinds may procure; namely, security and in- 
dependence. Certainly these are valuable possessions, and 
we may well ask the happy mortals who enjoy them what 
good fortune has made their lot so pleasant, Dens vobis haec 
otia fecit ? 



INDEPENDENT INCOMES 445 

To give a complete answer to this question would require 
an investigation of the origin of the various classes of income, 
especially of interest and land-rent ; and such an investiga- 
tion, which we shall attempt further on, would establish the 
principle that the man who receives an independent income 
lives on the product of past labor. 

When this income may be regarded as the result of his own 
past labor, as, for example, the pension received by a retired 
public official, or the income received by any one who has 
" put aside something " for his old age, there can be no reason- 
able objection to it. We cannot insist that a man must work 
throughout his entire life. If he has worked faithfully dur- 
ing the productive period of life, it is just and proper that he 
be permitted to take a rest during the unproductive period. 
Even socialists, such as Bellamy in his " Looking Backward," 
declare that under the collectivist regime a man of forty-five 
years should be relieved of all work for society and thereafter 
be permitted to do what he pleases and live upon an income 
provided by society. 

But when this past labor was the labor of others, i.e. of some 
immediate or remote ancestor, or even of some non-consan- 
guineal benefactor, who created a fortune at some time in the 
past and left it to the subsequent possessor with the right to 
consume it in idleness, — the question is a more embarrass- 
ing one and implies the solution of the difficult problem of 
inheritance. 

From the purely economic point of view this problem doubt- 
less is easy to solve. We have already compared money to 
"orders" for consumption or claims to goods, giving the 
owner the right to obtain a certain quantity of wealth, indi- 
cated by the value of the money. Suppose that a man has 
earned by his labor a large number of these " orders." If he 
does not care to use them himself (now or at some future 
time), he can transfer them to some one who will use them 
in his stead. Obviously, he has a perfect right to do this. 
(See page 220.) 



446 PRINCIPLES OF POLITICAL ECONOMY 

But from the moral point of view the problem is a more 
difficult one. It may well be held that the idle property-owner 
who lives on an income due to the labor of others is not 
" squared " with society by simply paying the price for the 
goods that he has consumed. It may be maintained that it 
is not sufficient for him to exchange only money, — that is 
to say, the product of the past labor of others, — but that 
he should also make some return in present services of his 
own, representing the equivalent of the income which he re- 
ceives. The goods that he consumes from day to day are 
the products of present labor, not of labor long past, and 
justice would seem to demand that in exchange for what his 
fellow-creatures are doing for him he should be required to 
do something for them. A classical economist has said that 
" the man who lives upon an independent income is an em- 
ployee who has been paid in advance." If he has been paid 
in advance, this implies that he still owes a certain amount of 
labor. He should, as the term goes, " make himself useful." 
If he is of no service, economists will in vain show that he 
furnishes a full money-equivalent for all that he obtains ; his 
lot is nevertheless that of a social parasite. 

It cannot be denied, however, from the historical point of 
view, that the so-called idle rich have in the past performed 
a genuine social function, a social function of the very first 
importance ; namely, the creation of the arts, the sciences, 
literature, politics, refinement, and culture, — everything, 
in a word, that constitutes civilization. We owe all these 
things to the idle rich of Greece, Rome, Judea, and of all 
those antique societies in which it must be admitted that 
idleness possessed the particularly odious characteristic of 
being due solely to force, robbery, and slavery. 

But will this always be the case ? In order to take 
proper care of the great interests of society, to unravel the 
fine threads of diplomacy, to hold the reins of government, 
or to carry worthily the sceptre of taste in the kingdom of 
arts and letters, shall we always have need of delicate hands 



THE IMPORTANCE OF LEISURE 447 

that have never been hardened by labor, and of minds that 
have never felt the burden of a binding duty or the neces- 
sity to earn a living ? 

Socialists assure us of the contrary. They hold that all 
the necessary and desirable social functions can and will be 
performed and rewarded even in modern democratic societies. 
They insist that all public servants, including all those persons 
that perform useful social services of any kind whatsoever, 
should be paid for these services. Admitting, furthermore, 
that certain intellectual or philanthropic work should re- 
main gratuitous, they hold that the socialistic organization 
of society will provide everybody with sufficient leisure, 
when his own work is done, to look after these matters in 
perfect freedom. 

There is no doubt that we should endeavor to assure to all 
persons a certain amount of leisure, not in order to enable 
them to remain idle, but to make them free to participate in 
all those liberal activities (using the term " liberal " in its 
etymological meaning) which are both a duty and an honor. 
This arrangement would remove the objections to the division 
of labor. (See page 181.) It is obvious that when a suffi- 
cient amount of leisure is assured to all, there will be no ex- 
cuse for the existence of a special class of idle rich. Hence 
the reduction of the hours of labor is, from this point of 
view, one of the most unquestionable achievements of the 
nineteenth century. But there still remains much to be 
accomplished in this direction. 

VIII. The Right to Relief 

The inequality of riches not only creates a class of idle 
property-owners, who live on their incomes, but it also gives 
rise in all countries to a more or less numerous class of idle 
dependents who cannot or will not live by their own labor, 
and who consequently live on alms, i.e. on private or public 
charity. 



448 PRINCIPLES OF POLITICAL ECONOMY 

There are three reasons for their failure to work : — 

(1) They may not have the strength to work. This is 
the case with young children, the aged, and all those who 
suffer from chronic diseases or permanent infirmities. 

(2) They may not be willing to work. All labor involves 
effort. Rather than make this effort, and, above all, rather 
than subject themselves to the discipline which every kind 
of labor involves, many prefer to run the risk of suffering 
want. (See page 82.) 

(3) They may be unable to find the means or the opportunity 
to work. It is not sufficient for a man to be willing to work ; 
he must be able to " find work," that is to say, he must have 
the material and tools at his disposal. When men are "out 
of work," they lack both of these requisites. 

What should society do with regard to these three classes 
of dependants ? It cannot escape the problem of making 
some provision for them. 

The first class should be taken care of, because society as 
a whole should feel a certain degree of responsibility for all its 
members. Under normal conditions the family should of 
course support those of its members who are unable to pro- 
vide for themselves. But under the present social system the 
members of the family are frequently scattered far and wide. 
Sometimes, even (as in the case of illegitimate children), 
there is no family. In other cases it is advisable to take 
children away from parents who pervert them or who simply 
regard them as a source of profit. How often, on the other 
hand, it would be well to take the old people away from 
their own sons and daughters who maltreat them ! If civil- 
ized society must let its young or its aged members die of 
hunger, would they not be better off in that savage state of 
society in which the old and the indigent were treated with 
veneration and love, or mercifully strangled in order that 
they should suffer no longer ? 

Society must care also for the second class, because it consti- 
tutes a public danger. The army of crime is recruited from 



SOCIAL RESPONSIBILITY 449 

this population of vagabonds and beggars. When they 
commit an offence, society is obliged to house and feed them 
in jail ; and as the support of a prisoner is a matter of con- 
siderable cost, it is more prudent and more economical to 
reduce crime than simply to punish it. 1 

Society should also give attention to the third class, be- 
cause it is to some extent responsible for their misfortune. 
The economic constitution of society involves an unnatural 
separation of the workman from the instrument of labor, 
and places him under the necessity of working for others 
in order to gain a livelihood. The very law of progress 
— as illustrated by large-scale production, mechanical in- 
ventions, international commerce, and competition — causes 
unemployment and crises. (See pages 113 and 142.) It is 
therefore just and proper that society, which as a whole 
profits by each step of economic progress and which in the 
battle of life reaps all the spoils of victory,' should also bear 
the unfortunate consequences of progress and come to the 
help of the injured and the vanquished. 

The claim which these various classes have upon society 
may be called the right to relief. Socialists, however, are not 
fond of this expression. They regard it as humiliating, and 
prefer to employ the term right to existence, or, when speaking 

1 In a paper on the " Cost of Crime," prepared by Mr. Eugene Smith for 
the National Prison Association, the statement is made that the cost of crime 
in the city of New York, in city and county taxes, is over $20,000,000, 
out of a total public expenditure of $90,000,000. Thus the cost of crime in 
New York averages $6 for each individual of the population. In most 
cities it is probably less than this, but in many of them it exceeds $3 per 
capita. Mr. Smith reaches the conclusion that for the whole United States 
the annual cost of crime is $200,000,000. This exceeds in amount every 
other object of public expenditure except only that of our military es- 
tablishment in time of war. The cost of public education throughout the 
whole United States, according to the census of 1890, amounted to $139,000,000. 
This is the item that most nearly approaches the cost of crime. It should be 
remembered, moreover, that this estimate of §200,000,000 represents only 
the outlay for the punishment of crime, and by no means includes the dam- 
age due directly or indirectly to criminal conduct. 



450 PRINCIPLES OF POLITICAL ECONOMY 

of able-bodied dependents, right to work. These are osten- 
tatious words, but at the bottom they mean nothing more 
than a claim upon society, i.e. upon one's fellow-citizens, to 
provide the means of existence. To ask our fellow-creatures 
for help because Ave are unable to take care of ourselves, 
always constitutes, no matter what name we care to give it, a 
request for relief. But there is nothing humiliating about 
such a request ; for there is not one of us but has constant 
need of the help of others. 

Only, when we use the expression " right to relief," we 
must admit its full purport, and recognize that it implies an 
obligation on the part of society, — not only a natural, but 
a legal obligation. Many economists regard relief as a social 
duty, but not as a right possessed by the dependent. This, 
however, is legal sophistry. Whenever a person happens 
to be placed under those conditions which call for interven- 
tion and which are carefully stated by law, society should 
not be permitted to escape the duty to help him. The 
expenses necessary to accomplish this object should form 
a part of the regular expenditure of the nation or the muni- 
cipality. When this is the case, we speak of legal relief as 
opposed to optional relief. 

It is true that relief, especially when regulated by law as 
part of the public administration, and still more especially 
when it constitutes a " right " belonging to the needy, in- 
volves grave dangers. These dangers have been brought 
out by all the classical economists, but by none of them with 
more vigor than by Malthus. The objections which they 
urge may be summed up in the familiar formula : The num- 
ber of dependents tends to increase in direct ratio to the aid they 
count upon receiving. The reasons given for this formula are 
the following : — 

(1) The right to relief puts a premium on improvidence. 
Many persons who might have succeeded in surmounting 
the difficulties of life, had they depended entirely upon them- 
selves, neglect to provide for their own future or for that of 



ARGUMENTS AGAINST RELIEF 451 

their children when they learn to depend upon public succor 

for themselves and their offspring. The farm-hands say in 

England : — 

" Hang sorrow and cast away care ! 
The parish is sure to find us ! " 

(2) The right to relief causes a rapid increase of popu- 
lation among the dependent classes. Paupers need have no 
anxiety with regard to the support of their offspring, since 
they are not required to rear them. A large family, on the 
contrary, means additional gain, inasmuch as resources are 
usually distributed according to the number of children be- 
longing to the family. Hence the government is obliged to 
pay a bounty, as it were, to the most prolific dependents. 
Thus there is formed, in the lowest depths of society, a large 
class of paupers whose names are all inscribed upon the rec- 
ords of public charity, and who become the permanent bene- 
ficiaries of the public. Generation after generation they 
transmit their claims on society as well as their vices, and 
continue a despised race, too degraded to be dissatisfied with 
their lot or to attempt to rise above it. 

(3) The right to relief burdens the productive classes of 
society for the sake of the unproductive classes, and interferes 
with the law of natural selection which tends toward im- 
provement by enabling the superior to triumph over the 
inferior. It is obvious that the pauper classes cannot be 
regarded as the healthiest or the most vigorous part of the 
social organism. Society provides for their relief by means 
of taxes, that is to say, by deducting a share of the prod- 
uct of the labor of those who are able to produce. As the 
class of dependents tends to increase most rapidly, the tribute 
which they exact from the laborious classes constantly grows 
more burdensome, and may ultimately drag the laborious 
classes likewise into the depths of poverty. 

Although the above arguments show that we cannot be too 
careful in the administration of public relief, they must not 
lead us to ignore the bond of social solidarity which unites 



452 PRINCIPLES OF POLITICAL ECONOMY 

all mankind. No one, in fact, denies all responsibility of 
society for its members ; the real problem is one of degree. 

We must admit that the prospect of regular help from 
the public treasury may tend to curtail productive activity 
and saving. But cannot the same be said with regard to the 
wealthy classes which we have considered in the preceding 
pages ? Does not the prospect of inheriting a large fortune, 
or the possession of a large amount of interest-bearing 
securities produce exactly the same unfortunate result as the 
certainty of public assistance ? 

We must also admit that the birth-rate is higher among de- 
pendents than among the classes that support themselves ; 
but if the children of the former can be made useful citizens, 
they should be regarded not as a danger but as a gain, espe- 
cially in view of the fact that among the rich the birth-rate 
is rapidly decreasing. 

It is true, finally, that the maintenance of all diseased, infirm, 
defective, or lazy persons may be prejudicial to the economic 
evolution of society. But moral advancement is quite as 
important as economic progress, and moral advancement 
would be sacrificed if society should pitilessly exterminate 
all these persons. 

We must, furthermore, carefully bear in mind that a well- 
organized system of public relief does not increase the number 
of dependents. At the present time public charity and relief 
is more effectively and scientifically organized than ever 
before ; never have its resources been greater ; never has its 
scope been wider. Yet the proportion of dependants has not 
increased. On the contrary, it has decreased in all countries, 
especially in England, despite the fact that England is re- 
garded as the very type of a nation in which public relief is 
established by law, and despite the fact that England served 
as the special theme of Malthus' most pessimistic predictions. 1 

lr riie number of those that receive relief in England, after having in- 
creased at a startling rate and reaching, in 1849, 63 per thousand (one de- 
pendent for every sixteen persons in the country), has now fallen to 23 per 
thousand (one for every forty-three persons). 

* 



SOCIAL INSURANCE 453 

To-day the remark is often made, especially by socialists, 
that the day of public and private relief and charity is past, 
and that their place will be taken by insurance, — insurance 
founded either upon mutual association or upon government 
cooperation. Certainly this would be desirable. An organ- 
ized system of insurance against sickness, against loss of 
employment, against the untimely death of the head of the 
family, and against all those misfortunes to which working- 
men are exposed, would certainly result in the suppression 
of almost all the economic causes of pauperism. But there 
would still remain the moral causes — such as drunkenness, 
laziness, and prodigality. Will better education ever remove 
these causes ? We can at the most only hope that it will. 

The unfortunate effects of public, legal relief are reduced to a minimum 
when it is organized on the following principles : — 

(1) It should be administered by the local authorities. The municipality- 
is much better able to distinguish the deserving from the impostors, and is 
usually more economical with its funds. 

(2) It should be granted by special institutions, which should, if pos- 
sible, be divided into three classes corresponding to the three classes of social 
inefficients mentioned above. Legal relief cannot attempt to go to the 
homes of the needy to distribute its funds or provisions. As far as help at 
the homes of the needy is concerned, legal relief can only supplement private 
charity and make it more systematic. The celebrated Elberfeld syste?n owes 
its superiority to the successful alliance of public and private charity. 

(3) It implies, finally, the strict prohibition of mendicancy. For if impe- 
cunious persons can procure help without working, simply by begging, no 
rational system of relief can hope to succeed. 



CHAPTER II — THE SOCIALISTIC SYSTEMS 

As the present method of distribution seems unjust from 
many points of view, men have long been in quest of some 
better, more equitable method. This quest has given rise to 
the numerous systems of socialism. 

It must be noted that socialists do not object to the pres- 
ent system solely from the viewpoint of distribution and of 
distributive justice. They would transform the entire sys- 
tem of production and exchange. Fourier, for instance, 
cares less for the means of effecting a better distribution of 
wealth than he does for the best way to increase the supply 
of wealth. Karl Marx regards all systems of distribution, 
past or present, simply as the necessary outcome of prevailing 
methods of production. 

Yet a brief investigation of the various systems of socialism 
seems most properly to belong to this book on Distribution 
because all of these systems are, fundamentally, phases of the 
perpetual war of the poor against the rich. 

In the first part of this book we outlined the general prin- 
ciples which are common to all schools of socialistic thought 
(see page 28), and we shall now point out the distinctive 
characteristics of the principal systems of socialism, especially 
those which advocate one of the following four principles of 
" equitable " distribution : — 

(1) Every one should have an equal share of the social 
product. 

(2) Each person should receive according to his wants. 

(3) Each person should receive according to his merits. 

(4) Each person should receive according to his work. 
Let us examine each of these in turn. 

454 



THE EQUALIZATION OF WEALTH 455 

I. Equal Sharing 

This childish system of distribution seems to have pre- 
vailed in the very remote past, inasmuch as all the antique 
lawgivers whose names have been handed down to us by 
history or by legend — Minos, Lycurgus, Romulus — appear 
to have divided the land among the people, giving an equal 
share to each person, or at least to each family. As this 
original equality was necessarily destroyed in the course of a 
few generations, it had to be reestablished from time to time 
by new divisions. In primitive communities comprising 
only a few members and having but one kind of wealth — 
land — such a system as this was possible. But in modern 
societies like our own it would be absurd. To-day there 
are, as a matter of fact, no advocates of equal sharing — 
not even among revolutionary socialists. 

There is nevertheless still a trace of this naive idea at the 
basis of socialistic systems. They take it for granted that in 
all civilized societies there is more than enough wealth to 
satisfy the wants of all, and that there are destitutes among 
us simply because the rich have despoiled the poor. All we 
need to do, therefore, is to take back that part of the social 
product which the rich have unjustly appropriated. Revolu- 
tionary socialists would do this simply by expropriation; 
moderate socialists would accomplish it by means of progres- 
sive taxation. This, at all events, is certainly the popular 
sentiment among socialists. 

In all countries, however, the rich constitute a small mi- 
nority. Society has often been compared, with regard to the 
relative numbers of rich and poor, to a pyramid, the apex of 
which represents the wealthiest persons, and the base the 
poorest classes. 1 Even if the incomes of the rich were divided 

1 Vilfredo Pareto, in his " Cours d'Economie politique," has given a vast 
amount of statistical data regarding the past and present distribution of wealth, 
and prepared what he calls " the curve of incomes." This curve confirms 
the illustration of the pyramid, but rectifies it to some extent by means of 



456 PRINCIPLES OF POLITICAL ECONOMY 

among all the people, no one would thereby become opulent. 
If we destroyed the highest mountain range in the country, 
and spread it out over the whole continent, the earth's level 
would not be raised more than a few inches. 

It is not sufficiently borne in mind that the existence of so 
many persons possessing but a small amount of the world's 
goods does not necessarily prove that wealth is poorly dis- 
tributed. It proves rather that there is not enough wealth 
for distribution. What makes this problem difficult is not 
so much the unequal distribution of wealth — this difficulty 
might easily be remedied — but the insufficiency of wealth. 1 

We have already defined wealth (see pages 48 and 49) as 
including all that mankind believes to be useful and can util- 
ize, reserving the term " services " to designate all the acts 
of man that are capable of directly furnishing enjoyment. 
We have, furthermore (page 184 fT.), pointed out that 
wealth is usually estimated according to its exchange value, 
that is to say, according to what it will bring on the market. 
Not all wealth is actually offered for sale; therefore we can 
only approximate its actual value. The ability to perform val- 
uable services, moreover, whether this ability be mere physi- 
cal strength or the special skill of the surgeon or the trained 
knowledge of the lawyer, is quite as important a source of 
income as corporeal wealth ; in an inventory of the nation's 
valuable possessions all the personal services that it has at 
its disposal should be counted. But it is impossible to com- 
pute the various personal services that form part of the 

mathematical calculations. If Pareto's results were expressed in the form 
of a pyramid, its sides would be concave, and it would terminate in a 
sharp, tapering point. Concerning the actual present distribution of wealth 
and incomes, see Section VI of the preceding chapter. 

A Then why, it may be asked, do we always hear complaints of overpro- 
duction ? The answer is simple. Overproduction in any branch of industry 
does not necessarily imply that more has been produced than is needed, but 
more than can be purchased by those who buy the products of this branch of 
industry. A proof of this consists in the fact that by lowering prices the 
surplus of goods can always be disposed of. Low prices may, to be sure, 
ruin the producers, but that is not the question which concerns us here. 



THE TOTAL WEALTH 457 

social wealth at any moment. Hence the common concep- 
tion of social wealth is limited to the material possessions of 
the community. 1 

Bearing this limitation in mind, we may estimate the total 
wealth of the United States and ascertain what would be the 
result of an equal distribution of wealth in this country. 

The census valuation of real and personal property in the 
United States (excluding Alaska) in 1890 gave a total of over 
$65,000,000,000, of which the most important items were as 
follows: $35,000,000,000 in real estate with improvements 
thereon; $2,700,000,000 in live stock on farms, farm imple- 
ments, and machinery; $1,300,000,000 in mines and quarries, 
including product on hand; $1,100,000,000 in gold and silver 
coin and bullion; $3,000,000,000 in machinery of mills, and 
product on hand (raw and manufactured); $9,700,000,000 
in railroads and equipment, including street railroads ; $700,- 
000,000 in telegraphs, telephones, shipping, and canals. 2 

1 Some economists have proposed to regard the productive population as 
part of a nation's wealth. If this be correct, every additional able-bodied im- 
migrant increases our national wealth ; his value may be " capitalized," on 
the basis of his annual earnings, at the current rate of interest. Dr. Engel, 
an eminent German statistician, estimates the value of an able-bodied immi- 
grant to a new country at $1000. 

2 The figures for 1890 were the latest complete official figures obtainable. 
The census for 1900, however, throws some light upon the probable increase 
of the total national wealth since 1890, inasmuch as the valuation of certain 
kinds of property in 1899 is given by the census authorities. Thus farm 
land with the improvements thereon, including buildings, amounted in 1899 
to $16,614,647,491 ; live stock on farms amounted to $3,075,477,703 ; farm 
implements and machinery were valued at $749,775,970 ; the value of farm 
products- was $3,742,129,357; the capital of manufacturing establishments 
amounted to $9,831,486,500, as compared with $6,525,050,759 in 1890. It 
is probable that this increase of 44 per cent in the value of manufacturing 
establishments was the greatest increase for the decade. 

Taking these figures into careful consideration, and after due reference to 
estimates made by several careful investigators, it is probable that the total 
wealth of the nation in 1900 was about $93,885,000,000 — an increase of 
about 40 per cent above the figures for 1890. 

Gide estimates the wealth of France at about $40,000,000,000. Divide 
this amount by the population, 39,000,000, and the quotient is about $1025. 



458 PRINCIPLES OF POLITICAL ECONOMY 

Dividing the total valuation by the population in 1890, we 
get a quotient of $1030 as the per capita wealth. Taking 
the average size of the family at that time as a basis, we find 
that each family would have $5073 as its share, if the wealth 
of the nation were equally divided; and of this amount 
$3086 would be in real estate and $86 in gold and silver. 

The national income for 1890 has been carefully estimated 1 
at $10,800,000,000, or about $431 for each person engaged 
in remunerative business, including men, women, and chil- 
dren. This would mean an average income of $769 per 
family. 2 

It may be maintained that this would be better than 
the present state of affairs for many of us. 3 Who would 

If all the wealth of France were divided equally, and each family is supposed 
to consist of four members, the property of each family would amount to 
$4100, of which about $1400 would be in land, $1000 in buildings, $1300 
in securities and credit claims, $260 in furniture, clothing, and objects of 
consumption, and about $140 in money. 

According to R. E. May ("Die Wirtschaft in Vergangenheit, Gegen- 
wart und Zukunft," Berlin, 1901) the per capita wealth of the other prin- 
cipal countries in 1895 was as follows : — 

United Kingdom, $1548 ; Germany, $799 ; Russia, $313 ; Austria, $533 ; 
Italy, $518 ; Spain, $692 ; Australia, $1312. 

The same authority finds the per capita income in 1895 for these countries 
to be as follows : — 

United Kingdom, $184 ; Germany, $126 ; Russia, $49 ; Austria, $85 ; 
Italy, $71 ; Spain, $79 ; Australia, $262. 

1 By Dr. C. B. Spahr, " The Present Distribution of Wealth in the United 
States" (1896). 

2 The total national income for 1900 was probably over $15,000,000,000. 

3 M. Vilfredo Pareto has carefully examined the income statistics of Prus- 
sia, which are probably more accurate than those of any other country. 
Supposing that all incomes now above $1200 per annum were reduced to 
that amount, and the surplus distributed equally among all the inhabitants 
of Prussia, the income of each would be increased by only $25. 

This recalls the familiar anecdote concerning the Frankfort banker Roths- 
child, who was taken by surprise by a few rogues during the revolution of 
1848. The rogues demanded that Rothschild share his wealth. The banker 
asked them how high they estimated his fortune and what was at that time 
the population of Prussia. Dividing his wealth by the total population, it 
was discovered that the share of each inhabitant would be about two dollars, 



COMMUNISTIC DISTRIBUTION 459 

deny it? But we must admit that in the event of such 
a change the economic position of each citizen would more 
closely approach poverty than opulence. Such a change 
as this, moreover, would involve a general expropriation 
and perhaps an appeal to violence, and would be much 
too dearly purchased. Gould not this modest, rather com- 
monplace ideal be attained by more peaceful methods ? 

II. Communism 

Every unbiassed thinker will admit that under modern 
economic conditions equal division is absurd. But is it 
necessary to divide wealth at all ? As every kind of 
division would simply give rise to new inequalities, why not 
regard all wealth as belonging to everybody, and consider 
the members of society as one would the members of the 
same family ? As in the family, let every one consume 
according to his wants. 

Such is the simplest and the oldest of all systems of social- 
ism. 1 But this system had already begun to be somewhat 

whereupon Rothschild, to their stupefaction, paid each of them this sum as 
his share and dismissed them. 

Socialists would probably object that under a new productive system the 
sum total of wealth would be increased. But this remains to be proved. 
There are, in fact, good reasons for believing that it would be diminished. 

1 The authors who have developed theories more or less communistic are 
very numerous, beginning with Plato's " Republic " ; but the most recent and 
most celebrated are Gracchus Babeuf, Robert Owen, and Etienne Cabet. 

Babeuf, who called himself Gracchus, because he regarded the Roman 
tribune of that name (who voted for the agrarian laws) as a socialist, was 
the leader of the conspiracy of the " Equals" under the French Directorate. 
He was sentenced to death in 1797, and executed. Babeuf prepared a 
scheme of social organization, the program of which began with the 
words, "Nature gave every man an equal right to the enjoyment of all 
things." 

Owen was born in North Wales in 1771, and died in 1857. He was not 
a revolutionary or democratic communist, but what might be called a pater- 
nalistic communist. He expected social reform to come from the upper 
classes. A rich employer of labor, and the proprietor of a factory at New 
Lanark, he inaugurated many of the philanthropic features of modern indus- 



460 PRINCIPLES OF POLITICAL ECONOMY 

out of date and even ridiculous, when, quite recently, the 
anarchists took up the theory and gave it a new lease of life. 
It must not be imagined that anarchism is based prin- 
cipally on the theory of the community of goods. The 
essential purpose and aim of anarchism is the complete and 
unrestrained development of human individuality. But 
many anarchists . regard communism as the sole means of 
attaining this purpose. They believe that private property, 
no matter how narrow a scope we may give it, always im- 
plies the existence of some limitation of personal rights and 
the establishment of an authority or power charged with the 
business of compelling the observance of this limitation. 
They hold that the private possession of anything whatso- 
ever will always be an obstacle in the way of those that 
possess nothing, and will become a means of exploiting those 
that have no property. Hence the only method of distri- 
bution which receives their approval is that of " taking just 
what you want " from the common store. 

trial life : reduced hours of labor, prohibition of child labor, cooperative 
societies among laborers, savings banks, and even non-sectarian schools. 
But he was not content with these improvements, and began to organize 
communistic societies, one of which was founded in the United States at 
New Harmony, Indiana (1826). This attempt failed completely. The 
cooperative movement, however, and the English factory laws owe much to 
Owen as their real founder. 

Cabet, the author of a romance, written in imitation of Sir Thomas 
More's "Utopia," entitled "Icaria," founded a society of Icarians in 
the United States, in 1848. The history of this community, which was 
first situated in Texas, then at Nauvoo, Illinois, and subsequently in Iowa, 
has been largely one of intestine quarrels. It has recently been disbanded. 

It is a mistake to classify Fourier among communists. In reality, Fourier 
was a communist only as regards the consumption and production of wealth, 
but not as regards its distribution. He considered life in common (in the 
"phalanstery ") only as a means of organizing production and consumption 
on a more economic basis, but by no means as aiming at the establishment 
of equality among men. Fourier declares expressly that his system permits 
the continuation not only of the inequalities which result from labor and 
talent, but also of those which result from unequal contributions of capital. 
(See the "Selections from the Works of Fourier," by Charles Gide, trans- 
lated by J. Franklin. London, 1901.) 



IMPOSSIBILITY OF UNRESTRICTED DISTRIBUTION 461 

It must be admitted that the rule, " To each according to 
his wants," would be the most agreeable one. 1 But wealth 
would necessarily have to exist in unlimited or at least 
superabundant quantities, if every one could take whatever 
he wanted in such amounts as pleased him — just as we now 
take the air or water that we want. 

Unfortunately this is not the case. The amount of wealth 
is, and probably always will be, insufficient for the satisfac- 
tion of our wants or our desires, because our wants and 
desires increase in direct proportion to the facility with 
which we can satisfy them. Hence, " taking just what you 
want " is impossible, and some method for sharing must be 
devised. 2 In the family, distribution is done by the author- 
ity of the father or mother, who gives a certain share to each 
member. But what authority in society shall be intrusted 
with this difficult task ? There can be no such authority, 
because the social plan of these communistic anarchists 
involves the suppression of all authority and all government. 
Their motto is, Neither God nor Master. All will be ad- 
justed, they assert, by way of mutual concessions, the ex- 
ercise of good-will and the feeling of fellowship. But it 
is obvious that there can be no justification for an assertion 
like this, — so contrary to all that we know of human nature. 

It must be borne in mind that we do not say, as some- 
times has been said erroneously, that a communistic organi- 
zation of society is absolutely chimerical. Communism 
certainly did exist at the origin of a large number of human 

1 We do not say that it would be the most equitable rule (as is sometimes 
said), because it is difficult to see in what manner great wants can be 
regarded as justifying great claims. Modest, temperate people would always 
lose by such a rule as this. Professor Gustav Schmoller has well said : " It 
is a gross error to make our wants a standard of distributive justice, for 
our wants necessarily have an egoistic character. Only labor, merit, and 
services can serve mankind, and consequently constitute a standard of 
distributive justice." 

2 Anarchists, to be sure, suppose that all sharing will be made unneces- 
sary by the superabundance of wealth. (See especially the books of 
Kropotkin.) 



462 PRINCIPLES OF POLITICAL ECONOMY 

societies, although perhaps not at the origin of all. Nor do 
we hold that its realization on a small scale is now impossible ; 
because, aside from religious communities, there are com- 
munistic societies in the United States 1 which have already 
been in existence nearly a hundred years, while new ones 
are being founded from year to year. Although they have 
accomplished nothing very remarkable, they have, neverthe- 
less, proved by their existence that the community of goods 
is not absolutely incompatible with labor and production. 
But note what have been, and must be, the conditions of their 
relative success : — 

(1) These communities must be very small, and not exceed 
a few hundred or a thousand members. 2 

This point is generally admitted by communists them- 
selves. Fourier fixed the maximum number of persons in a 
phalanstery at 1500. Owen fixed the number between 500 
and 2000. Anarchists would suppress the central govern- 
ment and the nation, and base their communistic society 
on the independent commune. The reason for this is quite 
obvious: with every increase in the number of associates 
the proportional interest of each member in the success 
of the enterprise decreases. When the number is very small 
each member may hope to profit to a perceptible degree by 
his own efforts ; but in a communistic society which should 
include all Americans, the interest of each member would be 
only one eighty millionth part of the whole — a fraction 
scarcely large enough to stimulate any one's personal zeal. 

It cannot be said that the political evolution of modern 
society appears to be tending toward the autonomy of local 
communities and the suppression of national, central govern- 
ments. On the contrary, all seems to point to centralization, 
the extension of the scope of government, the triumph of the 
principle of nationality and of imperialism. Even if it were 

1 Consult Nordhoff, " Communistic Societies," Richard T. Ely, " The Labor 
Movement in America," and Bulletin No. 35 of the U.S. Labor Department. 

2 All those which exist in the United States are small in numbers. 



THE NECESSITY OF DISCIPLINE 463 

possible to substitute independent communes for the central 
government, there would still be rich communes and poor 
communes ; the inequality of individuals would simply make 
way for the inequality of local groups. 

(2) These communities must be subjected to very strict 
discipline. It is easy to see a priori that the community 
of life, and equal treatment for all, must be incompatible 
with every encroachment by which one individual tries to 
consume more than his share, and with every emancipatory 
idea of trying to escape one's share of the burden* Expe- 
rience shows that the tendency is for members to try to 
evade the rules and to shirk the burdens put upon them, 
for in all the establishments in which there is life in common 
— convents, military barracks, and schools — there is in- 
variably a strict insistence upon obedience. 1 It should be 
noted in almost all cases that religious feeling carried almost 
to the point of fanaticism has alone been potent enough to 
secure that strict discipline which is necessary to the exist- 
ence of these communities. All the communistic societies 
of the United States, except that of the Icarians (which dis- 
banded in 1896), are of a religious nature ; and the Jesuit 
republics in Paraguay — really the only examples which are 
large enough, and have lasted long enough, to justify speak- 
ing of them — constitute veritable theocracies. 

The practice of the communistic regime, when combined 
with the anarchistic ideal involving the abolition of all dis- 
cipline and all regulation, is entirely absurd, and at all 
events seems thoroughly incompatible with the tendencies of 
modern life. 

1 The history of the republic of Icaria fully demonstrates this fact. New 
members constantly attempted to escape the rules which they found odious. 
Cabet himself tried vainly to obtain dictatorial power in the interest of the 
community. The Rules of the Icarian Colony (1856) give interesting proof : 
"Art. 4. Be prompted by your devotion to the community. . . . Art. 16. 
Bind yourself to perform the work assigned to you by the management. . . . 
Art. 26. Have no preferences or dislikes in the matter of food. . . . Art. 27. 
Bear with resignation the discomforts of life in common. . . . Art. 37. 
Bear whatever discipline is imposed." 



464 PRINCIPLES OF POLITICAL ECONOMY 



III. Saint-Simonism and Inheritance 

The school of Saint-Simon, to-day forgotten, exerted a 
remarkable influence upon an entire generation of French 
thinkers, and even upon -those of other countries, in the 
early part of the nineteenth century. 1 Although this school 
now is interesting only from the historical point of view, we 
must, nevertheless, say a word about it because it proposed 
a very attractive rule of distribution. The school of Saint- 
Simon insisted strongly on the claims of merit. They advo- 
cated a social hierarchy in which each one should labor 
according to his capacity and be rewarded according to the 
services rendered. 

This school accepted sincerely and literally the oft-ex- 
pressed thought that every man, even the master of an indus- 
trial concern or the mere possessor of a fortune, performs a 
"social function." The Saint-Simonians attempted to carry 
out this principle in practice. All trades, professions, and 
other branches of human activity they would turn into 
public offices, in the strictest sense of the term ; that is to say, 
people should be appointed to these positions, and remun- 
erated, by the government. 

Saint-Simonism, therefore, is a kind of socialism, with the 
peculiarity of being an aristocratic socialism. Far from for- 
bidding the existence of factory owners, capitalists, or even 
bankers, this school confers upon them the right to govern 
society and to occupy a rank inferior only to that of scien- 
tists and priests. It is not opposed to social inequality, 
but proposes to replace the inequality due to wealth by 
that due to individual merit. This is the thought expressed 

1 Saint-Simon died in 1825, and left behind him a politico-religious system 
which is more or less incoherent, but nevertheless characterized by occasional 
flashes of genius. His followers constituted a large group of influential 
men who literally fascinated the most distinguished thinkers of that period. 
Two of his disciples, Bazard and Enfantin, added largely to his teaching and 
made it far more accurate, especially from the economic point of view. 



INHERITANCE 465 

by their celebrated formula, " To each according to his 
capacity, measuring capacity by works." The French Revo- 
lution, they declared, was a failure because, although it put 
an end to all the political, fiscal, and civil privileges due to 
the accident of birth, it paid no attention to one privilege, 
the greatest and most absurd of all, namely, that of wealth. 
Logically, the French Revolution should have abolished in- 
heritance in all its forms, and especially in the most impor- 
tant social functions — those of the landed proprietor, the 
capitalist, and the employer. 

Thus the abolition of inheritance is the keystone of the 
Saint-Simonian system. It is impossible for us here to dis- 
cuss this system in detail, but there are some points which 
should be brought out with regard to it : — 

(1) Admitting for a moment that we might succeed in 
abolishing the inheritance of wealth, inheritance would still 
exist with regard to many other advantages, such as health, 
talent, mental traits, social rank, and even the family name, 
which, in carrying on an enterprise or getting a wife, is 
worth a fortune. Surely, nature herself plainly seems 
to have established the principle of inheritance and 
heredity. 

(2) It cannot be denied that by depriving men of the 
right to dispose of the results of their labor we should be 
attenuating one of the most powerful incentives to production. 
Goods which we have no right to dispose of as we think best, 
and which we should be unable to give away or bequeath to 
whomsoever we please, would lose a large part of their utility. 
They would be less desired, and we should make less effort 
to produce or obtain them. And we must admit — in simple 
justice to the nobility of human nature — that there are many 
persons who work and save for others, not only for them- 
selves. If you oblige them to think only of themselves, they 
will work less and spend more. What a vast amount of 
wealth would thus be transferred from productive uses to 
unproductive consumption! How many years would thus 



466 PRINCIPLES OF POLITICAL ECONOMY 

be withdrawn from productive activity and spent in prema- 
ture retreat from active life! 

(3) If, finally, we admit, in agreement with the Saint- 
Simonians, that the possession of riches constitutes a social 
office, is it not logical to conclude that the person who exer- 
cises this function is better able than any one else (even the 
government) to designate a proper successor — just as the 
Roman emperors themselves designated the future Csesar ? 1 

If, in the Saint-Simonian system, the head of the family is 
not permitted to designate his heirs, who, then, is to be en- 
trusted with the duty of designating the most capable and 
worthy successor ? Shall the government appoint each indi- 
vidual to a particular occupation, precisely as to-day the 
state appoints its officials, giving them a rank and salary pro- 
portionate to their supposed merit and services? Such a 
government would have to be as infallible as the Pope — as 
infallible as " the Priest " was really assumed to be by Saint- 
Simon, — to justify the exercise of so great a power. Would 
it not generally be conceded that wealth is now distributed 
much less unjustly by the accident of birth than if it were 
distributed according to the favor and arbitrary will of some 
sort of a pontiff ? 

And even if, instead of the choice of the government, 
appointments took place by popular vote, we may be sure 
that the most capable would not secure the positions for 
which they are best adapted. Nor would anything be 
gained, finally, by adopting a system of competitive exami- 
nations covering all kinds of labor and all manner of func- 
tions from the lowest to the highest ; for this would probably 
result in the worst kind of mandarinism. Therefore it seems 
foolish to regard the abolition of inheritance as the proper 
means of realizing the distributive formula of the Saint- 
Simonian school : To each according to his capacity, measur- 
ing capacities by services. It is, at all events, unwarranted 

1 It should be noted that this argument can justify only inheritance by 
will ; the first argument is rather a defence of intestate inheritance. 



COLLECTIVISM 467 

to take it for granted that the proposed system would be an 
improvement on the present competitive system. We may 
properly ask, moreover, even from the standpoint of ideal 
justice, whether the Saint-Simonian principle possesses the 
ethical value ascribed to it. May one not reasonably hold that 
intellectual or physical superiority ought not to be a claim 
to greater wealth or greater remuneration than that received 
by those who are less gifted ? Is not exceptional intelligence 
or physical superiority in itself a sufficient advantage, little 
requiring to be emphasized by the additional privilege of 
claiming a larger share of material wealth ? 

IV. Collectivism 

Collectivism is a moderate form of communism. It in- 
volves the common ownership of only the instruments of 
production, — land and capital ; products are still left under 
the regime of private property, although collectivists desire 
a more equitable distribution of them. 1 

Collectivism does not pretend to be a scheme of social 
organization founded on abstract principles of justice. 

1 Collectivism is of quite recent date. The term seems to have been used 
first by a Belgian writer, Colins, (1850) ; but the collectivism of Colins was 
largely agrarian. The distinction between instruments of production and ob- 
jects of consumption, — which lies at the basis of the collectivist theory, — 
was made by Pecqueur in 1838, and Vidal in 1846. The first systematic, ag- 
gressive statement of the doctrine, however, was made by Marx and Engels 
in their famous " Communistic Manifesto," issued in 1847. 

Ferdinand Lassalle and especially Karl Marx (the first volume of whose 
celebrated book on "Capital" appeared in 1867, and two more since his 
death) developed an elaborate economic doctrine of collectivism which 
constitutes the arsenal from which collectivists for more than thirty years 
have drawn their most effective weapons for attacking the present social 
system. 

Cesar de Paepe, a Belgian (who died in 1891) was the first to sketch a 
complete scheme of collectivist organization. 

Although collectivism is often designated as " Marxism," in honor of its 
most illustrious theorist, not all collectivists are disciples of Karl Marx. 
The "Fabian Society" in England, and the so-called "independent" col- 
lectivists in France, do not, strictly speaking, belong to the school of Marx. 



468 PRINCIPLES OE POLITICAL ECONOMY 

Unlike so-called Utopian socialism or idealistic socialism, 
it purports simply to investigate the forces which are at 
work in social evolution, and to discover as the result of 
this investigation that modern society is inevitably tending 
toward a new order of things. Unchangeable laws of 
social progress have brought about the development of 
large-scale production, large-scale trade, and the concentra- 
tion of property in the hands of fewer and fewer persons. 
All these changes are gradually doing away with small- 
scale individualistic methods of production and substituting 
collective production in their stead. Property must be 
individualistic when production is individualistic. The 
system of production and that of distribution have hitherto 
been in perfect harmony with each other; the small medi- 
aeval workshop was an example of this. But industry, 
trade, and property, have now entered upon a new period, 
characterized by large-scale methods. The scope of individual 
production is steadily being narrowed, while that of large- 
scale collective enterprise is constantly widening. Examples 
of this are numerous enough to challenge the attention of the 
most casual observer : large factories, great mining and 
manufacturing enterprises, railroad companies, department 
stores, trusts and industrial combinations of all kinds. Dis- 
tribution, however, continues to be founded on private, in- 
dividualistic property ; that is to say, on a legal system which 
is no longer adapted to the actual economic organization of 
society. There is consequently at the basis of modern society 
a growing incompatibility, an antagonism, between its legal 
and its economic structure, which will ultimately result in 
the collapse of the present capitalistic regime and the aboli- 
tion of private property in the instruments of collective pro- 
duction. The invincible logic of evolution teaches that 
collective methods of production require a collective system of 
ownership. 

As we have said, collectivism differs from communism in 
that the latter seeks to establish the common ownership of 



COLLECTIVE PRODUCTION 469 

all goods without exception, whereas the former advocates 
common ownership only in the instruments of production, 
consumers' goods remaining subject to private ownership. 
To be more accurate, we should add that collectivism at 
present does not even advocate the common ownership of all 
the instruments of production, but only of those that are ex- 
ploited collectively, i.e. by means of the employment of 
wage-workers. Thus the land cultivated by its owner, the 
boat which belongs to the fisherman, the mechanic's own 
workshop, — although these are all instruments of pro- 
duction, — as long as they are really under the control of the 
individual and are really the means of individual production, 
will not be transferred to social ownership. 1 

Collectivists assert, 2 however, that in the due course of 
economic evolution all the present forms of individualistic 
production are bound to disappear : they will either be 
eliminated by the increasing pressure of competition, which 
small concerns cannot withstand, or by voluntary trans- 
formation into collective enterprises. And as the evolution 
of property is necessarily parallel to that of production, the 
time must come when all the instruments of production will 
be transferred to collective ownership. 

It must be admitted that expropriation 3 is practically the 

1 As long as the instruments of production are still in the hands of the 
laborer, collectivists do not regard them as capital, in the sense in which they 
employ that term. (See page 118.) They are, therefore, logical in their 
programme. 

2 It would be better to say that collectivists formerly made this assertion, 
for now they appear to prefer leaving this point in obscurity. The collecti- 
vist party in its political programmes sometimes designates itself as the true 
and only defender of small land-holdings, of the small workshop, and of the 
small storekeeper. In Germany the socialist party is divided on this point ; 
the opportunists follow the same plan as in France and endeavor not to 
antagonize the small landowner, whereas the faithful disciples of Marx de- 
clare, — and rightly declare, — that this is contrary to the true principles of 
Marxism. 

3 With or without indemnification ? Moderate collectivists favor indem- 
nification, provided the propertied classes are willing to submit with good 
grace to the process of " socialization." But if these classes offer resistance, 



470 PRINCIPLES OF POLITICAL ECONOMY 

only means of accomplishing this transfer of private property 
to collective ownership. This will be the last step in that 
class conflict, begun many centuries ago, which Karl Marx 
regards as the most fundamental fact of history and as the 
key to all historical events. 

Collectivists declare that when expropriation has taken 
place, the instruments of production will be utilized by the 
nation or the commune, either directly or by means of trades 
unions or labor groups. The proceeds will be paid into the 
national treasury, which, after deducting the part necessary 
to meet the general expenses of society, 1 will give back the 
surplus to the laborers, who may then dispose of it exclu- 
sively and entirely as their own property. 

But according to what formula would products be dis- 
tributed among the producers ? Although this is regarded 
as a question of secondary importance, collectivism also has 
its distinctive formula of distributive justice. Unlike the 
communistic formula, which gives to each according to 
his wants, collectivism proposes to reward each person 
according to the effort he has made, measured by the number of 

the collectivists favor expropriation pure and simple, and an appeal to force. 
Everybody knows that in reality the second alternative is the only possible 
one. In the first place, it would be impossible to find the sum of money 
necessary to indemnify the owners (about ninety billion dollars in the United 
States) ; and, in the second place, admitting even that the owners received 
some sort of indemnification, this indemnification (probably in the shape of 
coupons with which to purchase goods at the social stores) could not give rise 
to interest or revenue of any kind, and would doubtless be worth no more 
than mere assignats. 

1 These general expenses would be much greater than present taxes, because 
they would have to cover the cost of keeping all the children, old persons, and 
invalids, as well as the cost of insurance against risks of all kinds, and the 
cost of maintaining all productive establishments and equipment (since all 
these belong to society). Some provision would also have to be made for 
forming a reserve fund to maintain and increase the social capital. 

It is true, on the other hand, that public expenses would be reduced by 
the interest on the public debt, which would no longer be paid, and, the 
collectivists believe, all expenditures for the army and navy, because there 
would be no more war. 






COLLECTIVIST DISTRIBUTION 471 

hours he has worked. 1 Those who are unable to work 
receive a certain minimum allowance. 

In the official statements of their views, collectivists 
maintain that this partial communism would suffice to re- 
move the defects of the present social system. 

First of all, they declare, it would result in the disappear- 
ance of extreme economic inequalities, for these inequalities 
have no other cause than the accumulation of capital and 
land in the hands of a few families. The accumulation 
of capital takes place with increasing rapidity, much as a 
snowball gathers volume and momentum as it rolls down a 
hillside. This rapid increase is due to inheritance, loan at 
interest, and the creation of incomes by the aid of hired 
labor. Capital permits its owners to grow rich by the labor 
of others. But as, under collectivism, no one would be able 
to profit except by his own labor, economic inequalities would 
be greatly reduced. 2 

It would, they hold, do away with the idle classes and 
social parasitism. When no one can become the exclusive 
owner of land or capital, it is obvious that there will be 
no room for persons who live on incomes due to invested capi- 
tal or to the possession of real estate. When these sources 
of supply are cut off, such persons will be compelled to work. 

It would eliminate excessive labor. In the first place, the 
proceeds of productive activity would be increased by that 

1 "The quantity of labor is measured by its duration. . . . But the 
labor which constitutes the substance of values is equal, uniform human 
labor, the expenditure of the same intensity of labor-power." — Karl Marx. 

2 Collectivism, however, does not do away with inheritance, as is fre- 
quently supposed. If a man has accumulated anything and cares to transfer 
it to some one else, collectivists would not object ; the beneficiary might live 
without working, — as long as the inheritance lasted. 

This concession may appear surprising at first, unless we recall that 
collectivism excludes land and capital from the domain of private property, 
that is to say, practically the only kinds of wealth which are productive 
and lasting, and the only kinds which give rise to permanent inequalities. 
Hence inheritability is limited to objects of consumption, and has but little 
importance. 



472 PRINCIPLES OF POLITICAL ECONOMY 

share which was previously appropriated by the idlers and the 
parasites ; and, in the second place, as all useless and absurd 
branches of production would be abandoned, the labor re- 
quired of each member of society would be greatly decreased. 
Four hours at the most, and perhaps three, would suffice to 
secure the same results as are now achieved ; an English 
socialist has calculated that even one hour and twenty 
minutes per day would be enough ! 

It is held, moreover, that collectivism would do away with 
pauperism. For if society as a whole became the owner of all 
the land and all the capital, society would find employment for 
all who were able to work ; and for those who were unable to 
work, society would at least provide the means of existence. 

Collectivists maintain, finally, that by recognizing property 
in the product of one's own labor and the right to dispose 
freely of one's possessions, individual liberty would be kept 
perfectly intact; and that this social system would obviate 
entirely the danger of communistic tyranny or the necessity 
of living in the uniform, disciplined manner of a communistic 
familistery. 

In answer to these assertions of the collectivists, the fol- 
lowing points may be raised : — 

(1) The so-called law of social evolution upon which 
collectivism is founded, viz. the gradual transformation of 
individual, isolated production into collective production, is 
only a sweeping generalization ; it does not cover all the 
facts of social evolution, and is contradicted by many of 
them. We have already pointed out (see pages 166 ff.) 
that in agricultural production there is, in spite of collec- 
tivist assertions to the contrary, no proof whatever of this 
tendency to large-scale production. On the contrary, the 
land is being divided into smaller sections, and the average 
size of the farm tends to decrease with the increased density 
of population and the progress of intensive methods of 
farming. Large-scale methods of agriculture, and the accu- 



CRITIQUE OF COLLECTIVISM 473 

mulation of property in land, are altogether exceptional 
phenomena. Even in manufacturing, small concerns have 
not been driven out of existence by large enterprises, but 
have increased quite as rapidly as the latter. 1 

It is therefore highly probable that collectivists, tired of 
waiting patiently for the termination of a slow evolutionary 
process the ultimate result of which seems increasingly uncer- 
tain, will employ violence to accomplish their purpose. The 
change thus effected may, if the collectivists should obtain 
control of law-making, preserve all the forms and the appear- 
ance of perfect legality ; the violence they employ may 
therefore be legal violence. But the change would be none 
the less revolutionary. An ideal, moreover, that can be 
realized only by an appeal to force must necessarily be odious. 

(2) The right of private property, which collectivists 
assert they are simply narrowing somewhat by confining it to 
those products that are the result of one's own labor, would 
under collectivism be a mere illusion. For if the owner- 
ship of these products were recognized, and possessed all 
the attributes which constitute the right of property (espe- 
cially the right to lend, to sell and to exploit as a source of 
income), it would again give rise to the inequality of wealth ; 
it would, moreover, again create the classes of creditors and 
debtors, employers and employees, buyers and sellers, and 
thus rebuild the whole economic edifice which had been over- 
thrown. Hence collectivists expressly stipulate that the so- 
called owner of " property " would in no case be permitted 

1 The doctrine of the increasing concentration of property and production 
has already given rise to lively discussion among collectivists themselves. 
Bernstein, one of the keenest thinkers in the ranks of collectivists, in a book 
which created quite a turmoil (" Zur Geschichte und Theorie des Social - 
ismus," Berlin, 1901), attacked this doctrine openly. He pointed out, for 
instance, that in England the number of families having incomes between 
$750 and $5000 has increased to more than three times what it was thirty 
years ago ; the number of small workshops employing from one to ten 
laborers has almost doubled. Many new occupations, such as photography 
and the repairing of bicycles and automobiles, have sprung up and given rise 
to a great number of small shops. 



474 PRINCIPLES OF POLITICAL ECONOMY 

to sell or lend his share of the productive proceeds, or to 
use it as a means of employing the labor of others. 1 He 
would be allowed only to consume it or keep it or give it 
away. He would be forbidden, in other words, to use it for 
any other than unproductive purposes. This state of affairs 
would not be very reassuring from the standpoint of pro- 
ductivity. It is, furthermore, extremely probable that the 
possessors of wealth would be unwilling to accept without a 
protest this narrow limitation of their rights as owners. 
They would persistently seek to make a more profitable and 
effective use of their "property"; and this would be likely 
to necessitate the enactment of drastic measures to prevent 
them from doing this, — measures singularly vexatious to 
those who cared anything for individual liberty. At all 
events, the right of property, thus emasculated and robbed 
of its most essential attributes, would become a mere shadow, 
and we should soon degenerate into a state of society scarcely 
distinguishable from communism. 

Hence it is a vain boast for the collectivist to maintain 
that his system is a happy mean between communism and 
the individualistic regime. It appears, moreover, that collec- 
tivism must ultimately lead to the former of these social sys- 
tems, unless, indeed, it deliberately reverts to the latter. 

(3) The plan to substitute " directors " appointed by 
society or elected by the labor unions, for all the " captains 
of industry," employers, landowners, and capitalists, is well 
calculated to cause grave anxiety in the minds of those who 
have any knowledge of practical industrial conditions and of 
the meagre economic training of the laboring classes. 

But the social class whose disappearance may well cause 
most anxiety is that of the capitalists who save. There are 

1 Will he be permitted to use it as a means of producing in conjunction 
with his own labor, independently of others ? Collectivists would doubtless 
allow this provisionally, that is to say, as long as there are any autonomous 
producers. But logically this would not be compatible with collectivism, 
inasmuch as the aim of the collectivist system is to do away with individual, 
isolated production, and make all production social and collective. 



CAPITAL UNDER COLLECTIVISM 475 

in this country millions of large and small capitalists, — 
especially the latter, — who together save many millions of 
dollars each year, who perform the exceedingly important 
economic function of maintaining and increasing the riches 
and prosperity of the nation, and augmenting its supply of 
productive capital. They do this, to be sure, in their own 
interest, not because the economic progress of society demands 
it ; but the outcome is of no less vital concern for the entire 
nation. 

Under a collectivist regime, the great motive, the main- 
spring, of individual saving would be destroyed. Why? 
Because it is very unlikely that persons who are sure to 
receive at least an amount of wealth sufficient to provide the 
necessities of life will seek, in the interest of society as a 
whole, to consume less or to cut down that part of the social 
proceeds which constitutes their share. Let us even admit 
that some persons would continue to put aside a part of their 
income, in the form of labor coupons or certificates or what- 
ever medium of exchange is employed. In this event they 
would keep this part of their share simply for the satisfac- 
tion of future wants, and would never think of investing it; 
in fact, they could not do so even if they desired, because 
this is strictly forbidden. All they could do with their sav- 
ings would be to hoard them unproductively, and in a manner 
which furnished no advantage or utility whatsoever to society 
as a whole. 

But how, we must therefore inquire, will the maintenance 
and accretion of the nation's supply of capital be provided 
for, when the formation of capital by private saving will 
have been done away with ? Public saving is suggested as 
a substitute. Society as a whole, we are told by the collec- 
tivists, would do precisely as financial organizations are now 
in the habit of doing: it would put aside 10 or 20 per cent of 
its proceeds as a reserve fund. But we must raise the ob- 
jection that a government which knows how to save, which 
is willing to save, and which is able to save, has never yet 



476 PRINCIPLES OF POLITICAL ECONOMY 

been known to exist; we are therefore asked to take it for 
granted that a collectivist government will in this respect 
be entirely unlike all kinds of government that have pre- 
ceded it ; that it would be economical and provident ; that 
it would, in brief, possess all those sterling, conservative 
qualities that to-day characterize the despised small capitalist 
and the successful business man. 

(4) The proposed distributive formula immediately gives 
rise to an exceedingly important ethical * problem, 1 viz. 
whether each member of society would be rewarded accord- 
ing to the labor performed, that is to say (as the system of 
Marx implies), according to the productive effort made; or, 
whether it would not be better to reward each person accord- 
ing to the ultimate outcome of his productive activity, meas- 
ured by the product itself. In other words: Shall labor 
itself, or the product of labor, be the ultimate standard of 
distributive justice ? 

Nor is this all. Even admitting the ethical superiority of 
the rule that measures the recompense by the trouble of pro- 
duction, there remains the question whether this rule could 
be applied practically. It would manifestly be impossible to 
carry out such a rule as this if, as we have attempted to prove 
(pages 52 fT.), and as the majority of modern economists con- 
tend, the value of all things is determined at least in part by 
desire or utility, and does not necessarily have any direct 
connection with the labor involved in their production. If 
our theory be true, value cannot possibly be determined by 
any such rigid rule as that proposed by Marxism. We may, 
to be sure, give to each member of society, in exchange for 
his labor, a number of " certificates " or " tickets " equal to 
his hours of labor. But it would be impossible to guarantee 
that in exchange for these certificates he will be able at any 
time to obtain goods representing an equal period of equal 

1 The school of Marx refuses to discuss this ethical problem and expressly 
eliminates all moral considerations from its argument. But the ethical prob- 
lem nevertheless exists and demands solution. 



MARX'S MEASURE OF VALUE 477 

labor ; for no conceivable power can prevent a rare com- 
modity from being worth more than one which is abundant, 
although both may cost the same number of hours of labor. 

Suppose, furthermore, that this formula were adopted as the 
law of distribution. Is there not reason to fear that its 
practical application would have unfortunate effects on the 
productivity of society, and that it ,would put a premium on 
laziness ? For experience shows that the man who devotes 
most time to a given task is generally not the good, but the 
poor workman. 

Marx answers this objection by declaring that he does not 
propose to count the time spent by a particular workman on 
a particular product, but to find out how many hours are 
usually necessary under given social conditions to produce 
the commodity in question. Value is measured, says Marx, 
by " socially necessary hours of labor," that is to say, " by 
the period of labor required to produce any exchange value 
under present normal social conditions of production, and 
with the average degree of dexterity and intensity of labor." 
This period is calculated on the basis of statistical data. 
Given, for example, the number of bushels of wheat produced 
annually in the United States ; given the number of laborers 
engaged in its production ; and given the number of hours 
these laborers worked ; it will not be difficult, says the 
Marxist, to determine how many hours and minutes of labor 
are on the average necessary to produce a bushel of wheat. 1 

1 The economists who explain value by the subjective theory of final or 
marginal utility have no difficulty whatever in demolishing Marx's theory of 
value, inasmuch as they deny absolutely the possibility of discovering any 
objective standard or common measure of value. The theory offered by Marx 
is in fact (as we have already hinted on page 59, note 1) a development of 
the classical labor theory of value. It is therefore interesting to note what 
an eminent economist of the modern classical school has to say with regard 
to Marx's theory : — 

" The hours of labor suggested by Marx as a common measure of value," 
says Professor Paul Leroy-Beaulieu, "and applied to all kinds of labor, is 
simply an ideal entity which corresponds to nothing real or tangible. Marx's 
idea that labor is the measure of value because it is the cause of value is en- 



478 PRINCIPLES OF POLITICAL ECONOMY 

Such a calculation is by no means an easy matter. But 
let us suppose that it is. Under the proposed system no 
one would have any interest in producing more than the 
average amount of wheat. The ideal of justice, moreover, 
which this formula seemed to approach, on closer examina- 
tion is grossly violated. When we speak of the effort or 
trouble or labor of production, and of the motives and in- 
tentions that prompt the worker, we should consider individual 
labor, not social labor. Justice demands the adaptation of 
recompense to the deserts of each separate person ; it has 
nothing to do with social averages. 1 

V. Cooperation 

In its etymological sense the word cooperation simply 
means " working together " ; but it is now employed in a 
more definite, specific sense by those who regard it not 
merely as a means of attaining certain aims or of accom- 
plishing certain social improvements, but as a complete 
scheme of social reconstruction. This scheme is not exactly 
socialistic, because it would retain private property, together 
with its principal attributes. 2 Yet it is socialistic in the 

tirely incorrect. Value has no other cause than the intensity of the desire 
for an object and the difficulty of its acquisition ; this is in turn usually regu- 
lated, in the case of a very large number of objects, by the cost of production. 
But the cost of production does not consist simply of the ' time of labor ' (to 
employ Marx's expression) ; it includes very diverse elements, many of which 
cannot be reduced to quantitative expressions of labor. The intellectual and 
material labors of man are so varied, moreover, are of such diverse impor- 
tance both from the point of view of their actual result in the shape of con- 
crete products and of their proper remuneration, that it is impossible to re- 
duce them to a single common basis." 

1 Many efforts have been made (by William Thompson, Owen, Rodbertus, 
and especially by George Renard in his book on " Le Regime Socialiste ") to 
discover some simple, easy plan for distributing wealth proportionately to 
labor. But there is no simple, self-operating device conceivable other than 
the law of supply and demand. 

2 In recent years, however, a certain number of collectivists, and even 
some anarchists, have advocated cooperation, without abandoning their plan 
to socialize property. They regard cooperation as a preparatory stage, 



MODERN COOPERATION 479 

sense that it proposes a social ideal entirely different from 
that of the individualistic and capitalistic system, and seeks 
to realize several of the most important desiderata of social- 
ism. It does not, however, postpone social betterment until 
society has been revolutionized, but, meanwhile, secures a 
real and immediate improvement in the conditions of human 
existence. 

In the beginning of the nineteenth century, Robert Owen 
(in England) and Fourier (in France) considered that man 
and the world might be completely transformed by means of 
voluntary association or cooperation. To accomplish this, 
they invented more or less ingenious schemes which proved 
unsuccessful. But the necessities of hard, practical life, 
more potent than theories of reform, have given rise simul- 
taneously in several countries to widely different varieties 
of association. In England there are consumers' coopera- 
tive societies ; 1 in France, cooperative societies for produc- 
tion ; in Germany, credit associations ; in Denmark, rural 
cooperative societies ; in the United States, building associ- 
ations, mutual benefit societies, etc. These associations 
have, to an extent that is still quite limited, already begun 
to make important changes in prevailing economic condi- 
tions, and to open the way for the realization of great hopes. 

simply as a step toward their ultimate goal. For cooperators generally, the 
cooperative commonwealth is an end and aim in itself ; they are not blind to 
the deficiencies of cooperation, but they believe that it is the basic, essential 
principle of the coming society. 

1 We have throughout this book used the term "consumers 1 cooperative 
societies " when speaking of such cooperative institutions as those which pre- 
vail in England. These are not examples of cooperative consumption, but 
of cooperative distribution, in the customary sense of the term. The mem- 
bers do not consume goods together, but together engage in their sale, i.e. 
their distribution. 

The term "consumers' association" must not, moreover, be confounded 
with "consumers' leagues," such as have been founded throughout the 
United States, especially in cities. These leagues consist of large numbers 
of consumers who discourage the purchase of any article made in unsanitary 
buildings or the makers and sellers of which are inadequately paid. 



480 PRINCIPLES OP POLITICAL ECONOMY 

We cannot here investigate each kind of cooperative associa- 
tion in detail, and mnst refer the reader to those sections of 
the book under which the different varieties of cooperation 
are discussed. 1 We shall, however, point out some of the 
features which characterize all kinds of cooperation, — fea- 
tures which really constitute a programme of social reform : — 

(1) All cooperative organizations aim at the economic 
emancipation of certain classes of society in order that they 
may do away with unnecessary intermediaries or middlemen 
and learn to suffice unto themselves. Consumers' societies 
help consumers to get along without butchers, bakers, and 
other retail shopkeepers, by enabling them to purchase 
goods directly from the producers, or, better still, by them- 
selves producing whatever they need. Credit associations 
enable borrowers to escape the clutches of usurious money- 
lenders, by obtaining for them directly the capital which 
they need, or even by helping them to create this capital for 
themselves by means of ingenious schemes for collective 
saving and mutual assistance. Productive associations 
enable workers to dispense with employers, by making com- 
modities under their own guidance and selling them directly 
to the public. 

(2) They all aim at the substitution of solidarity for com- 
petition, and of the cooperative motto, " Each for All," for 
the individualistic device, "Everybody for Himself." 
Instead of competing with each other, men form associations 
to provide for the satisfaction of their wants ; and these 
associations make it a rule not to compete with each other ; 
but, on the contrary, to unite in the formation of great coop- 
erative federations. 

(3) They all aim not to abolish private property, but to 
make it more general by facilitating the acquisition of pri- 

1 For cooperative consumers' societies, see the sections on Consumption ; 
for building associations, see the section on Some Special Forms of Credit ; 
for productive cooperation, see the chapter on Profit ; for cooperative credit 
associations, see the chapter on Credit. 




AIMS OF COOPERATION 481 

vate capital either by saving or borrowing, and to create 
corporative property or collective ownership of stores, banks, 
workshops, factories, and houses. 1 

(4) They all aim, not to suppress capital, but to deprive 
it of its controlling influence in production, and to withhold 
that part of the product which capital appropriates in the 
form of profits and dividends. The abolition of profit in all 
its forms was the essential feature of Owen's reform scheme. 
Many cooperative associations are expressly forbidden by 
their constitutions to make any profits, or are obliged to pay 
them into a reserve fund. Other associations distribute 
profits among their members in proportion to their pur- 
chases (when the members are " purchasing " members), or 
in proportion to their labor (when they are employees), but 
never in proportion to their shares, i.e. to the capital they 
furnish. Those who contribute shares of capital and those 
who make loans of capital always do so simply for a moderate 
interest, never in consideration of dividends. Some socie- 
ties pay no interest at all on their capital. When we note 
that in joint stock companies and corporations, which are 

1 The number of cooperative societies in England (1901) is 1648. The 
statistics for 1604 of these societies showed a total membership of 1,919,555 
persons; shares amounting to £24,595,706 ; annual sales amounting to £81,- 
782,949 ; annual profits, £9,099,412 ; investments, £15,577,863. 

German cooperative credit associations, according to the latest report pub- 
lished (for 1901) had funds amounting to about $330,000,000, i.e. $55,000,000 
in shares or reserves, and $275,000,000 in outstanding loans. 

On July 1, 1902, there were 1641 consumers' cooperative societies in 
France. Six hundred and sixty-three of these societies reported a total 
membership of 160,438. There were also 323 productive cooperative socie- 
ties in France, principally in the building trades. 

The Danish Farmers' Cooperative Association includes 1056 cooperative 
dairies, which in 1901 produced butter to the value of $37,500,000, and ex- 
ported 7,350,000 eggs. 

Even Japan has 486 cooperative associations. 

It is practically impossible to get any reliable figures with regard to the 
present status of cooperation in the United States. The student would do 
well to consult the cooperative newspapers with regard to the movement in 
this country, — especially the American Cooperator, published at Lewiston, 
Maine. 



482 PRINCIPLES OF POLITICAL ECONOMY 

now increasing so rapidly in wealth and numbers, capital 
appropriates the proceeds of the enterprise, conducts pro- 
duction, and reduces all the workers to the rank of hired 
employees, we are better able to understand that the system 
of cooperation really means nothing less than a social revo- 
lution, inasmuch as it reverses the present situation, and 
places capital under the command and control of labor. 

(5) Lastly, all cooperative associations possess great educa- 
tional value because they teach their members to sacrifice no 
part of their individuality or their spirit of enterprise, but, 
on the contrary, to develop their energy and ability to the 
utmost degree, to help others by helping themselves-, to regard 
the satisfaction of legitimate wants (not the pursuit of prof- 
its) as the purpose of economic activity, to raise the moral 
level of economic relations by suppressing advertisements, 
trickery, food adulteration, the sweating system, etc., and to 
abolish all the methods by which men exploit each other, as 
well as all the causes of social conflict. Indeed, it may be 
said that each important variety of cooperative association is 
characterized by the abolition of some social conflict, of some 
clash of economic interests : the consumers' association sup- 
presses the conflict between seller and buyer ; the credit 
association suppresses the conflict between creditor and debtor; 
the productive association suppresses the conflict between 
employer and employee. 1 

Can these associations carry out so ambitious a programme 

as this ? As the oldest of them has been in existence less 

than sixty years, it would be difficult to give an unqualified 

answer. M. Claudio Jannet, however, who was certainly not 

a cooperator, felt justified in declaring that cooperation is 

" the only social experiment of the nineteenth century that 

1 There are other forms of association which also aim at the suppression 
of economic antagonisms. Trades unions, for example, and combinations of 
employers, endeavor to suppress competition among workers in the same 
trade or employers in the same business. But in these cases the conflict is 
due to a rivalry of similar interests, while cooperative associations attenuate 
the conflicts due to divergent, opposite interests. 



AIMS OF COOPERATION 483 

has been successful." Cooperative societies of production, 
on which early French socialism founded such great hopes of 
social regeneration, have, in some instances, achieved glorious 
success, but these instances have thus far been few in num- 
ber. But cooperative credit associations, and especially con- 
sumers' associations, have developed most remarkably, and 
are still growing with a rapidity that amazes their adversaries 
and even their advocates. Consumers' associations now aim 
at the absorption of all other forms of cooperative organiza- 
tion, and thus to establish, as it were, a cooperative common- 
wealth in which the complete control of production shall be 
placed in the hands of the consumers themselves. Certainly 
the accomplishment of this object would be an economic 
transformation of no mean significance. 1 

1 Professor Paul Leroy-Beaulieu, in his large " Economie Politique," gives 
the objections that are raised against cooperation as a principle of social 
regeneration. Consult also Gide's volume on "La Cooperation." 



PART II. THE VARIOUS KINDS OF INCOME 

We have considered the general principles of the distribu- 
tion of wealth. We must still make a more detailed exami- 
nation of the share which each of us receives as income, and 
discover the origin and causes of each kind of income. 

If we were living under a system of isolated production, 
each person producing upon his own land and with the aid 
of his own implements, such a study as we are about to make 
would be unnecessary. Each of these autonomous producers 
would keep for himself the entire product of his labor ; no 
one could rightfully dispute his claim to it, and there would 
be absolutely no need for discussion. 

But we know that this supposition is far from true, unless 
it be in very small industries. To-day, the principal, agent 
of production, called the entrepreneur, 1 or projector, usually 
furnishes only a small share of the elements indispensable to 
production ; he is obliged to borrow from others part or all 
of these elements : labor, land, and capital. Therefore he can- 
not retain all the product for himself, but must first pay his 
collaborators for their assistance, and the share which each 
of them receives constitutes his income. To the laborer he 
will give wages, to the capitalist interest, and to the land- 
owner rent; and the remainder the entrepreneur will keep 
for himself, provided there is anything left. This remainder 
constitutes his own income, and is a distinct variety of income 
called profits? 

1 The French term entrepreneur, literally meaning undertaker (the person 
at the head of any undertaking), has now acquired current usage in English. 

Adam Smith and the old English economists did not distinguish the 
entrepreneur from the capitalist. J. B. Say first pointed out the distinction, 
although the word was used by Quesnay. 

2 Instead of giving his co-partners their share after the value of the prod- 

484 



THE SHARERS IN DISTRIBUTION 485 

For this reason logic would seem to require that we begin 
this review of the various categories of income by taking up 
profits, since the entrepreneur has charge of distribution, and 
all the other kinds of income must pass, so to speak, through 
his hands. This, however, is by no means the case. As we 
have just said, profit is that part of the value of the product 
which is left after the shares of the other participants have 
been withdrawn. Hence it is most convenient to begin with 
the study of the three other kinds of income. 

The threefold division of distribution possesses the advan- 
tage of corresponding very closely to the three branches of 
production. Each of the three factors which unite in the 
work of production has its distinct share in the product. 
This seems so perfectly natural that the classical economists 
paid no attention whatever to the justification of these various 
kinds of income. Their existence and the necessity for them 
seemed perfectly self-evident. 

The economic mechanism which we have described, how- 
ever, in which the entrepreneur plays a very important part, 
possesses an artificial or at least accidental character; it is 
simply one phase of economic evolution. If we recall the 
limitations pointed out in connection with the threefold divi-. 
sion of production (see page 69); if we remember, moreover, 
that labor, or rather man, is the true agent of production, 
and land and capital only instruments in his control, the 

uct has been realized, the entrepreneur may do this in advance. This is 
precisely the custom with regard to wages and rent ; but it makes no differ- 
ence in the nature of distribution. 

It is, moreover, possible and even customary for the entrepreneur to pro- 
vide some of the productive elements. He may furnish all or part of the 
capital. Generally he provides a certain amount of labor. But this matters 
little from the theoretical point of view, for in this event the entrepreneur 
simply combines other functions with those that naturally devolve upon him, 
and the total income which he receives will consist of several theoretically 
distinct elements. Even though he provided all the necessary elements for 
production, and produced goods independently of the help of others, his 
income may theoretically be divided into the four component parts here 
pointed out. 



486 PEINCIPLES OF POLITICAL ECONOMY 

serene confidence of classical economists in the reasonableness 
and justice of this symmetrical division is somewhat shaken, 
and it would appear both natural and just that the laborer 
should receive the entire product. Land and capital being 
both inert things, they cannot pretend to claim for themselves 
any share in the product. It would seem that to speak of 
their rights or their claims, and to regard them as sharers in 
the proceeds of productive activity, must be purely meta- 
phorical. Only persons can have rights or claims. It is of 
course understood that land itself or capital itself makes no 
claim to a share, but the landowners and capitalists who 
represent them. But is it not, at the very least, necessary 
for these persons to state why, and by virtue of what right, 
they are authorized to speak in the name of the land or of 
capital ? 






CHAPTER I — WAGES 
I. Definition of Wages 

Wages, as generally defined by economists, mean the 
income received by a person in exchange for his labor. 

If we adhere to this definition, wages must be regarded as 
the natural income par excellence, — as the income that has 
always existed and always will exist. We cannot conceive 
a social state in which a man could live otherwise than by 
exchanging his labor, or the products of his labor, or his 
services, for a certain amount of wealth. The classical econ- 
omists have consequently declared that all men live by labor; 
or, as Mirabeau put it, " all men are wage-workers, except 
thieves and beggars." The classical economists regard even 
landowners and persons living on independent incomes as 
belonging to the category of workers. 

But in our opinion this definition is not correct; it is prob- 
ably inspired by a perhaps unconscious desire to regard wages 
as the most natural and perfect kind of remuneration, and to 
accept the wage-system as a permanent and necessary insti- 
tution. 

Now it should be the province of science to discriminate, 
and to distinguish the various kinds of " labor " and the in- 
comes arising therefrom, rather than to confound them. The 
word "wages," in the language of economics as well as in 
that of everyday speech, should be applied not to every kind 
of remuneration for labor, but only to the remuneration for 
a particular kind of labor ; that is, for labor performed 
under certain clearly defined conditions. It should, in a 
word, be defined as the price of labor hired and employed by 
an entrepreneur. 1 

1 Indeed, in everyday speech, wages means the pay of the laborer, that is 
to say, of the man who works for an employer. The other kinds of remu- 

487 



488 PRINCIPLES OF POLITICAL ECONOMY 

We have repeatedly had occasion to note that the employ- 
ment of laborers by the entrepreneur constitutes the striking 
feature of modern economic organization. It is, in fact, 
inseparable from the present economic organization of society. 
The wage-system and the industrial leadership of the entre- 
preneur or employer are, so to speak, two aspects of the same 
social institution. Labor now being a commodity that is 
offered for sale on the market may be called merchandise. 
The worker is the seller ; the entrepreneur is the purchaser ; 
and the price is called wages. 

It is therefore obvious that the payment of wages is a 
method of remuneration of comparatively recent develop- 
ment in the economic history of mankind, — a method which 
has been made general by the capitalistic constitution of 
present society and the use of labor hired by employers. 
It is not impossible, moreover, that the wage-system may 
disappear with the disappearance of the present economic 
system. This will be made plainer in the next section. 

II. History of the Wage-system 

At all times, even under the slave system of antiquity, 
there were poor freemen who hired their labor to the rich 
members of the community in exchange for money or for 
goods ; these men may perhaps be regarded as wage-workers. 
But this kind of labor was entirely exceptional. There could 
be little use for men of this class in that long period of eco- 
nomic evolution to which we have given the name of " family 
economy" (page 132), — the period in which the labor of 

neration for labor have different names. The income of professional men 
consists of fees, retainers, honoraries, etc. That of officials is called their 
salary. Although these persons live also by their personal labor, they do 
not sell their labor to an employer or entrepreneur, but to their patients, 
clients, etc., or to a political community. The economic laws which deter- 
mine the remuneration received by these persons are entirely different from 
those which regulate the wages of employees. We cannot, however, enter 
into the problem of the determination of all these incomes, but must confine 
ourselves to the most important of all, i.e. wages. 



RISE OF THE WORKING CLASSES 489 

slaves or serfs was sufficient to produce all that was needed 
by the household. These free laborers were more like 
modern independent workers " in business for themselves," 
i.e. autonomous producers living by their trade. They were 
occasionally hired to help out in cases where the slaves or 
permanent servants were not sufficient. 1 

Nor could there be a large class of genuine wage-workers 
under the second economic system discussed above (page 133), 
— that of guild industry. The "journeymen" were doubt- 
less paid by the master of the shop, but their relation to him 
was not that of wage- worker to employer. The journeyman 
and the master were bound together not only by social fellow- 
ship and close association, but by reciprocal legal duties. 
Journeymen could not be discharged at the pleasure of the 
master, nor could they, of their own choice, cease working 
for the master. Their wages and their labor were regulated 
by the statutes of the guild. All of them, moreover, hoped 
some day to become masters themselves, and for most of 
them this hope was ultimately fulfilled. 

In brief, under this system the workers and the masters 
did not constitute two opposing social classes, but simply con- 
stituted two successive stages in a man's industrial career. 

But toward the end of the Middle Ages the small town 
markets about which the guilds had grouped ceased to be the 
centre of economic life. The great states of Europe began 
to assume definite shape and to constitute economic organ- 
isms. New roads and routes were opened and gave rise to 
national and even international markets. The mediaeval 
masters were unable to produce on a sufficiently large scale 
for these enlarged markets. Their place was gradually taken 
by capitalists and wealthy merchants who subsequently be- 
came industrial leaders. Thus the modern "employer" of 

1 Sometimes a master would lend his slaves to other persons for a fixed 
price, which might perhaps he called wages ; hut this payment was entirely 
different from wages as they exist to-day, because the master received it, and 
not the slaves themselves. 



490 PRINCIPLES OF POLITICAL ECONOMY 

labor was evolved at the same time that the " journeymen " 
found it impossible to become " masters." Gradually a body 
of men came into existence who were unable to look forward 
as a matter of course to a time when they should themselves 
be master-craftsmen. They began to form a distinct work- 
ing-class in a more modern sense of the term. Shut out 
from the guilds of the masters, they formed guilds of their 
own, consisting exclusively of journeymen. These were 
really the first trades unions. From that time onward, capi- 
talists and laborers are separated, and the history of labor 
ceases to be the history of capital. 1 

Still another step was required for the evolution of a class 
of wage-workers such as exists to-day. It was necessary to 
suppress all the rules and regulations which caused the 
economic inferiority of the guild system, and which were 
a hindrance as well as a protection to the workman. It 
was necessary to remove the restrictions which had previ- 
ously hedged about the manual laborer on all sides, and 
by virtue of the right of private property and free contract 
to allow the laborer to do with his labor what he pleased. 
It was at this time that manufactures were created or fos- 
tered by the government, entirely outside the scope of guild 
influence ; they employed considerable numbers of these 
free laborers, and were enabled to apply an elaborate division 
of labor and large-scale methods of production. Ultimately, 
most European governments did away altogether with guild 
regulations and decreed the entire liberty of labor to engage 
in any occupation at any time or any place, under conditions 
agreed upon by employer and employee according to free 
contract. 

This last step made the workers free : free to sell their 

1 Consult : Ashley, " An Introduction to English Economic History and 
Theory " ; Seebohm, " The English Village Community " ; Cunningham and 
McArthur, "Outlines of English Industrial History" ; Gomme, "The Vil- 
lage Community " ; Cheyney, " Industrial and Social History of England" ; 
Gross, "The Gild Merchant." 



THE SYSTEM OF FREE CONTRACT 491 

labor at a price determined in the open market by the law of 
demand and supply ; free to refuse employment or to stop 
work when it pleased them to do so. And of course the 
employer was also free, under the same conditions, to pay 
them the minimum price for which labor could be obtained ; 
free to hire men, women, or children, and to discharge them 
at his pleasure. The contract of hire was made as free as a 
contract of sale, — much more simple, in fact, inasmuch as the 
law made no provisions concerning it, — and human labor 
became a commodity the value of which is fixed by«the same 
laws as govern the value of any other merchandise. All this 
accomplished, the modern wage-system was the result. 

No one, not even a socialist, would think of denying that 
this economic regime has given a remarkable impetus to pro- 
duction, or that it accounts largely for the present industrial 
status of civilized nations. Nor would, on the other hand, 
any fair-minded person deny that industrial liberty was at 
first much more profitable to the employers than to the em- 
ployees. The latter were isolated, unorganized, the victims 
of laws which forbade them to unite and which therefore 
placed them under conditions most unfavorable to the sale 
of the only commodity they possessed ; this commodity, — 
their labor, — they were obliged to sell for a mere pittance. 
It is generally recognized, moreover, that from the end of the 
eighteenth to the middle of the nineteenth century the con- 
dition of hired laborers (especially in Europe)" was very 
unfortunate, and that the wage-system was even less advan- 
tageous to them than preceding industrial systems. 

But during the past thirty years many improvements have 
been effected in the condition of employed labor, for these 
reasons : — 

(1) Because employees have learned to unite and form 
organizations for the better defence of their interests ; and 
because the prohibitive laws which placed obstacles in the 
way of exercising the perfectly legitimate right to organize 
have been abolished. 



492 PRINCIPLES OF POLITICAL ECONOMY 

(2) Because in many countries so-called " labor laws " or 
" factory laws," which we shall summarize later, have been 
passed in the interest of the working classes to provide 
humane safeguards such as existed under the guild system, 
but which were subsequently done away with. These laws 
regulate the hours of work ; insure laborers against accident, 
sickness, old age, etc.; and secure hygienic conditions of 
employment. Although they have not attempted to fix the 
rate of wages, they have usually established certain rules 
with regard to the method of payment and the discharge of 
employees. 

III. The Laws of Wages 

Laws of wages should formulate the general principles 
which determine the rate of payment for hired labor and 
should indicate the causes of its rise or fall. The problem 
of wages is one of the greatest in political economy, and has 
given rise to a multitude of celebrated theories. Before 
taking up this problem, however, two distinctions require to 
be drawn very clearly, viz. that between real and nominal 
wages, and that between the real and nominal cost of labor. 

We often speak of wages as the "laborer's share of the 
product." This, however, is not entirely accurate. The wages 
of the weaver, for instance, do not consist of a certain num- 
ber of yards of the cloth which he has helped to weave. The 
wages of labor, at least in modern civilized societies, are 
almost always paid in money; and in many countries the 
law prescribes that wages must be so paid. 1 They represent 
a certain share of the value of the product. But as the con- 
tract of hire is made before work is undertaken, wages are 
agreed on before the product is sold. The employer, more- 

1 Payment in commodities — supplied usually by stores kept by the 
employers — is called the truck system. This system was at one time quite 
prevalent in England and in this country, where workers were obliged to 
take out a certain part of their wages in purchases at the stores. It has 
often been made a device for robbing the laborers. 



KEAL WAGES 493 

over, is obliged by law to pay the stipulated wages, whether 
the product prove salable or unsalable, of little or of great 
value. Wages, therefore, are advanced by capitalists in 
anticipation of a future return. 

If the laborer received his remuneration in cloth or in 
whatever other commodity he had produced, he would have 
to sell it in order to buy food and fuel and to pay the rent 
of his house. This, to say the least, would be a difficult 
matter ; the worker prefers to have money, because of its 
advantages under the present system of division of labor 
and exchange. The payment of money for labor, however, 
must not blind us to the fact that what the laborer really 
works for is not money, but bread, clothes, fuel, and all 
the other things he wants. These are his real wages ; pro- 
vided he gets more of them, it does not matter whether 
he gets more or less money. If food or clothing or fuel or 
rent become dearer, the wages of every workman are really 
lessened. On the other hand, everything which makes goods 
cheaper increases the real wages of the workman, because he 
can get more goods in exchange for the same money wages. 

We may therefore, with Francis Walker, define real wages 
as " the remuneration of the laborer reckoned in the neces- 
saries, comforts, and luxuries of life." Walker points out 
that wages may apparently be the same, and yet differ widely 
by reason of the following circumstances : — 

(a) Variations in the purchasing power of money. 

(6) The form of payment, as when the board of the 
laborer, the rent of a cottage, the privilege of grazing a cow, 
allowances of certain quantities of food, drink, or fuel, the 
right to take flour at miller's prices, one or more of these, are 
added to the money wages of the laborer. 

(<?) The greater opportunities in some avocations than in 
others for extra earnings by the laborer himself or by the 
members of his family. 

(d) The greater regularity of employment in some avoca- 
tions than others. 



494 PRINCIPLES OF POLITICAL ECONOMY 

( e) The longer duration of the capacity to labor in some 
avocations and some countries, than in others. 1 

From the standpoint of the laborer, therefore, real wages, 
not nominal or money wages, are of most importance. This, 
however, is not the sole aspect of the wage problem. From 
the standpoint of the employer wages may be high, — not 
only nominally but really, — and yet labor may be cheap. 
When we speak of cheap labor, we refer usually to labor that 
is poorly paid. But this is not strictly correct. " The cost 
of labor is high or low, according as the employer gets an 
ample or a scanty return for the wages he pays the laborer, 
whether these be low or high." If a bootmaker receives $2 
a day and makes 87 worth of boots, his labor costs less than 
that of the bootmaker who is paid only $1 a day and makes 
only |3 worth of boots. 2 

Differences in the productivity of laborers in the same 
trade and locality are often so great that wages are not paid 
according to the time of work, but according to the quantity 

1 Mortality differs greatly according to occupation. The insurance com- 
panies recognize this by refusing to insure persons engaged in certain extra- 
hazardous occupations. In a calculation based on a comparison between 
the census returns in England for 1881 and the death registers for the three 
years 1881, 1882, and 1883, and relating only to males between 25 and 65 
years of age, Dr. Ogle found the lowest death rate to be among clergymen. 
Taking this class as a basis (represented by the figure 100), the comparative 
mortality among lawyers was 152 ; medical men, 202 ; farmers, 114 ; brew- 
ers, 245 ; innkeepers and liquor dealers, 274 ; file-makers, 300 ; Cornish 
miners, 331 ; earthenware makers, 314. 

Dr. Edward Jarvis has shown that, on the average, an Irishman who has 
reached the age of 20 has 28.88 years to live ; a Frenchman, 32.84 ; an 
Englishman, 35.55 ; a Norwegian, 39.61. 

"It is evident," says Francis Walker, "that if two persons begin to 
labor productively at the same period of life and continue at work until 
death, at the same nominal rate of wages, that one receives the higher real 
remuneration who lives the longer, inasmuch as the cost of his maintenance 
during the first unproductive years of life, must, in any philosophical view 
of the subject, be charged upon his wages during his period of labor." 

2 " The labor on a ton of steel billets and rails in the United States (1901) 
costs less than in Great Britain, though American wages are higher. The 
labor cost of a certain grade of shoes in a Massachusetts factory, where 



THE PRICE OF LABOR 495 

of work that is done. Such remuneration is called piece 
wages as distinguished from time wages. 

In view of the numerous factors of the problem of wages, 
we may well ask whether there are in fact any natural laws 
which regulate the rate of wages. Is not the quest of such 
laws futile, inasmuch as wages vary from trade to trade, 
from time to time, from place to place, and in each particu- 
lar case are determined by the outcome of bargaining be- 
tween employer and employee ? 

To reason thus, however, would be erroneous. The price 
of other things also varies according to time, place, and 
the nature of the commodity; it also may be said to be the 
result of bargaining between buyers and sellers. Yet these 
circumstances do not preclude the existence of laws govern- 
ing prices. There is no incompatibility between this appar- 
ent variability and the existence of scientific laws. Prices 
and wages are, to be sure, regulated by agreements between 
men, but these agreements are themselves determined by 
general causes which it is our task to discover. A well- 
founded belief in the existence of natural laws in political 
economy must lead us to hold that when men make contracts 
they are influenced by certain motives or by certain exterior 
circumstances which are present in all cases and which can 
be disentangled from the confused mass of particular cases. 1 

wages are high, is only 40 cents a pair, but in Germany, where wages are 
low, the cost is 58 cents a pair. Such results are due to highly trained labor 
and the best labor-saving machinery and skill in its use, which greatly reduce 
the cost of products, though the price of labor may be high. Thus the 
United States, with high-priced labor, is able to sell many of its manufactures 
in foreign markets in competition with countries in which the price of labor 
is low." — C. C. Adams, " A Text-book of Commercial Geography," 1901. 

1 It is, moreover, quite as inaccurate to say of wages as of prices, that 
they are fixed by individual contract. Just as there is a general market 
price that is but little influenced by individual higgling, so there is also a 
general rate of wages for each kind of labor, — a rate which is quite as bind- 
ing on employers as on employees. 

It would seem, however, that there must be not one, but as many different 
rates of wages as there are occupations. There can, in fact, be no doubt about 



496 PRINCIPLES OP POLITICAL ECONOMY 

It is not the province of a scientific law to explain each par- 
ticular case in all its details, but to formulate those general 
and permanent tendencies which are present everywhere, 
although they may be partially overcome or disguised by 
local, temporary, or accidental circumstances. No one would 
think of abandoning the law of gravitation as scientifically 
worthless, simply because flowers grow upward and balloons 
rise in the air in apparent violation of it. 

As in the present economic organization of society, labor 
is simply a commodity that is bought and sold on the mar- 
ket, 1 it is evident that the price of manual labor must be 
determined by the same laws as those which govern the 
price of any merchandise. These laws we have studied in 
connection with value, and summarized in the popular doctrine 
of supply and demand. This doctrine is expressed in 
Cobden's classic and picturesque formula: "Whenever two 
workmen run after one master, wages fall; whenever two 
masters run after one workman, wages rise." 

We have seen that the theory of demand and supply is 
too vague and inaccurate to serve as a scientific law of value. 
Hence economists have likewise abandoned it as a law of 

the inequality of wages. But these inequalities can generally be explained 
by the unequal risks and advantages or disadvantages of particular trades, 
the unequal duration of apprenticeship, the unequal productivity of labor, 
its constancy or inconstancy, etc. This topic is the subject of interesting 
pages by Adam Smith and Professor Alfred Marshall. (See the latter's 
"Principles of Economics.") If we could estimate the exact importance of 
each of these elements and eliminate the factors which obscure the funda- 
mental problem, we should find that the rate of wages is theoretically the 
same in all trades. Under a hypothetical system of free competition 
(and assuming equal abilities, equally long apprenticeships, etc.) all trades 
would be equally remunerative ; for if they were not, workers would 
abandon the trades that pay less and take up those that pay more, and thus 
the natural equilibrium would be reestablished. But as this system of free 
competition is purely hypothetical, and particularly so with regard to labor, 
there are in reality wide divergencies in wages. When, therefore, we speak 
of the "current rate of wages " we mean the wages of common, unskilled labor. 
1 There are, however, several differences between labor and other commod- 
ities: (1) The worker sells his work, but he himself remains his own 



THE WAGES FUND THEORY 497 

wages, and endeavored to discover a more accurate and 
satisfactory formula. 

Three important wage theories (or groups of theories) 
have been suggested, each of which has attained considera- 
ble celebrity, and each of which has its advocates at the 
present time. 

§ 1. The Wages Fund Theory. For a long time this 
was the classical English theory of wages. It has played an 
important part in the history of economic doctrines, and 
approaches most closely to the popular theory of demand 
and supply, of which, in fact, it is merely a more precise 
statement. 

The supply, according to this theory, consists of the 
laborers who are in quest of work and who offer their ser- 
vices in order to earn a living. The demand, on the other 
hand, consists of the capital which seeks investment. We 
have learned that the only way to employ capital produc- 
tively is to supply work of some sort for laborers. The 
ratio between this capital and the number of laborers 
determines the rate of wages. 

Take the circulating capital of a country, which English 
economists call the wages fund because in their opinion its 
purpose is to support the laborers while they are employed 

property. When we say that labor is a commodity, it does not follow that 
the laborer himself is a commodity ; the product and the producer are differ- 
ent. (2) When a person sells his services, he has to present himself where 
they are delivered. As Marshall declares, " It matters nothing to the seller 
of bricks whether they are to be used in building a palace or a sewer ; but it 
matters a great deal to the seller of labor whether or not the place in which 
it is to be done is a wholesome and a pleasant one, and whether or not his 
associates are such as he cares to have." (3) Labor is perishable. The 
laborer must find employment at once. His energy cannot be stored up. He 
must, moreover, sell it in order to live, and he cannot withhold it long from 
the market. (4) Concerted action is more difficult among the sellers of 
labor than among those that buy it ; the latter may take advantage of their 
stronger position and purchase labor at less than its normal value. (5) The 
supply of labor cannot quickly be adjusted to the demand for it. A long 
time is required to prepare and train labor for its work, and the returns 
which result from this training are realized much later. 



498 PRINCIPLES OF POLITICAL ECONOMY 

productively. Then take the number of laborers. Divide 
the former quantity by the latter, and the quotient is the 
average rate of wages. If, for example, the total circulating 
capital is two billion dollars, and the number of laborers is 
ten million, the annual average wages will be just $200. 

It is evident that according to this theory wages can vary 
only as one or the other of these two factors varies. A rise 
in wages, therefore, is possible only in the two following 
cases : — 

(a) If the wages fund, i.e. the aggregate amount to be 
distributed as wages, is increased ; and the only way in 
which this can be done is by saving. 

(6) If the laboring population, i.e. the divisor in this 
simple problem of division, is diminished. This can be 
done only by having laborers apply the principles ex- 
pounded by Malthus, either by abstaining from marriage 
or by having few children. 

As John Stuart Mill expressed it : " Wages depend on the 
proportion between the number of the laboring population, 
and the capital or other funds devoted to the purchase of 
labor. ... If wages are higher at one time or place than 
at another, if the subsistence and comfort of the class of 
hired laborers are more ample, it is for no other reason than 
because capital bears a greater proportion to population. It 
is not the absolute amount of accumulation or of production, 
that is of importance to the laboring class ; it is not the 
amount even of the funds destined for distribution among 
the laborers : it is the proportion between those funds and 
the number among whom they are shared." " Wages not 
only depend upon the relative amount of capital and (labor- 
ing) population, but cannot, under the rule of competition, 
be affected by anything else." 

Certainly this theory is not encouraging for the future of 
the working classes. It is to be feared that the divisor (the 
number of laborers) will increase far more rapidly than the 
dividend (the amount of available capital); whence it fol- 



OBJECTIONS TO WAGES FUND THEORY 499 

lows that the quotient (wages) must tend to diminish until 
a point is reached below which it cannot descend. The 
obvious reason for this is that it is a much easier matter to 
increase the number of children than to increase the supply 
of capital ; the latter implies abstinence, and the former 
implies the reverse. Population increases spontaneously; 
but not capital. 

Although the wages fund theory is still held by a number 
of economists, it is generally discredited. 

In the first place, the thought on which it is founded, viz. 
that a certain, definite amount of circulating capital is neces- 
sary for employing laborers, is of interest only with regard 
to production, not with regard to distribution. To know 
whether an entrepreneur has the means to set laborers to 
work, that is to say, whether he has sufficient raw materials, 
equipment, etc., is one thing ; to know what share of the 
proceeds of the enterprise he will be able to yield to his 
employees, is quite another thing. The first of these matters 
depends on what he possesses ; the second depends on what 
he produces. The demand for labor depends on the state of 
industrial activity ; but this activity depends in turn on the 
anticipations and plans of entrepreneurs much more than on 
the amount of capital that they possess. 

The apparent exactitude of this theory, moreover, is 
illusory. When we examine it more closely, it amounts to 
saying that the average rate of wages may be ascertained by 
dividing the total amount paid out as wages, by the number 
of wage-earners. This is simple tautology. Or, if we attach 
a more sensible interpretation to the theory, it means that 
wages are higher in a country that possesses a relatively 
large supply of capital than in one which does not ; but this 
is too self-evident a proposition to require any proof. 

We must inquire, finally, whence comes this circulating 
capital, this wages' fund ? Obviously, from labor itself. 
Professor J. B. Clark has suggestively compared the relation 
between labor and capital to the operation of a pump : " Let 



500 PRINCIPLES OF POLITICAL ECONOMY 

a man pump water into a full tank, and get what he wants 
for use from the overflow ; does the water for consumption 
come from the tank or from the pump ? In a sense from 
both ; and if important interests were dependent on the 
answer given, there would be here an opportunity for a fierce 
logomachy like that which has actually arisen over the origin 
of wages. The particular drops which are used come imme- 
diately from the tank ; but the amount in it is undiminished, 
and the draught virtually comes from the supply furnished 
by the pump. Moreover, the size of the tank has no influ- 
ence on the amount of the overflow ; that is gauged by the 
volume of the inflowing stream. In like manner, wages are 
taken immediately from a reservoir of capital ; but the 
amount in the reservoir is undiminished, since the quantit}^ 
which was drawn from it has already been added to it by the 
stream of products resulting from industry. It is the volume 
of products which sets limits to the amount of wages." 1 

Probably the most destructive criticism of the wages fund 
theory was that presented by Thornton, whose celebrated 
book "On Labour" led John Stuart Mill, who had most 
skilfully elaborated the wages fund theory, to abandon it. 
Thornton maintains " that laborers, by combining, may exer- 
cise a monopoly influence and so raise the rate of wages " ; 
and if this be true, then there can be no fixed wages fund, 
the exact amount of Avhich must be expended in wages. If 
there be a national fund, the whole of which must necessarily 
be applied to the payment of wages, this fund " can only be 
an aggregate of smaller funds of the same kind possessed by 
the several individuals composing the nation. But is there 
any specific portion of any individual's capital which the 
owner must necessarily expend upon labor ? . . . Does 
any farmer or manufacturer ever say to himself, ' I can afford 
to pay so much for labor ; therefore, for the labor I hire, 
whatever the quantity be, I will pay so much ? ' Does he 
not rather say, 4 So much labor I require ; so much is the 
1 J. B. Clark, "Philosophy of Wealth," page 127. 



THE IRON LAW OF WAGES 501 

utmost I can pay for it, but I will see for how much less than 
the utmost I can afford to pay I can get all the labor I 
require ? ' " 1 

§ 2. The Iron Law of Wages. This theory also starts 
from the fact that manual labor, or the power to work is, 
under present social conditions, a commodity that is bought 
and sold on the market. Workmen are the sellers. Em- 
ployers are the purchasers. But wherever there is free com- 
petition, is not the value of all commodities determined by 
the cost of production ? This cost regulates what economists 
call the natural price or normal value of goods. The same 
law must hold for the commodity called manual labor ; 
the price of labor (wages) must also be fixed by the cost of 
production. 

Lassalle, who made much of this theory of the cost of pro- 
duction of labor, and who called it the "iron law of wages" 
because of its supposed absolute and rigid validity, declares 
that the price of labor, " like the price of all other merchan- 
dise, is determined by the relation of supply and demand. 
But what determines the market price of any merchandise 
or the average ratio of supply and demand ? The necessary 
cost of production." 2 

We must now learn the meaning of the words "cost of 
production" as applied to the person of the laborer. Take 
a steam engine for illustration. The cost of producing with 
the engine includes : (a) the value of the fuel consumed ; 
(5) the sum that each year must be devoted to keeping it 
in good repair and ultimately replacing it when it becomes 
unfit for further use. In very much the same way, the cost 
of production of labor includes : (a) the value of the goods 
which the workman must consume to support himself and 
maintain his productive powers ; (b~) the amount necessary 
to replace this workman by another when he becomes unfit 

1 See Macfarlane, " Value and Distribution," Philadelphia, 1899, Book 
IV; also Francis Walker, "Political Economy," Part VI, Section V. 

2 Lassalle, " Herr Bastiat-Schulze-Delitzsch," Chapter 4. 



502 PRINCIPLES OP POLITICAL ECONOMY 

for work, i.e. the amount necessary for raising the number 
of children required by society. 

Thus wages are necessarily determined by the minimum 
that is absolutely necessary for the support of the laborer 
and his family. Putting this law in more general terms, 
wages cannot long remain above or below the amount neces- 
sary for the maintenance (subsistence and propagation) of 
the laboring class. 

For thirty years this theory has been repeated again and 
again by socialistic agitators, like the refrain of a war-song, 
and has served excellently as a means of intensifying class 
hatred and fostering dislike of the present economic system 
with which it is supposed to be inseparably connected. It 
was used to convince the laboring classes that the present 
economic organization offers them no hope of the permanent 
improvement of their hard lot. But although the theory 
received its characteristic name from the collectivists, and 
although it owes its wide acceptance largely to them, it was 
first advanced by classical economists. Turgot was the first 
to declare that "in every kind of labor the workman's 
wages must fall to a level determined solely by the necessities 
of existence." J. B. Say and Ricardo used almost the same 
words, and have since been roundly criticised for unwittingly 
laying the foundations for socialism. 

To-day, the theory is abandoned. The liberal school, not- 
ing what dangerous conclusions might be drawn from this 
doctrine, disclaimed it most energetically ; and the collectiv- 
ists themselves, particularly Liebknecht, formally disavowed 
it at the Congress of Halle in 1890. 1 

If we take this theory literally, as meaning that the work- 
man's wages can never rise above what he absolutely requires 

1 Collectivists, nevertheless, continue to assert that wages are reduced to a 
minimum. But the reason which they give for this statement is a different 
and more valid one. They maintain that the permanent existence of a large 
number of laborers out of work, who are willing to sell their services for any 
price whatever, affects the market for labor and prevents any permanent rise 
in wages. They call the unemployed "the reserve army of labor," — an 



CBITIQUE OF THE IKON LAW OF WAGES 503 

to live on, it is much too pessimistic and is manifestly con- 
trary to facts. The purely material wants of life are, on the 
whole, of relatively little consequence. Irish and French 
peasants find it possible to live on next to nothing. If, then, 
the indispensable minimum for the bare support of life con- 
stituted an " iron law of wages," innumerable commonplace 
facts would be inexplicable. Why is the rate of wages 
not the same in all trades ? Must an engraver or a skilled 
mechanic consume more food-stuffs, more nitrogen and 
carbon, than a stone-breaker or a street-cleaner ? Why, 
moreover, are wages higher in the United States than in 
France, Germany, or England ? Is there any physiological 
reason why an American should eat more than an English- 
man, - — despite the fact both of them belong to the same 
race ? Why are wages higher to-day than a century ago, — 
a fact which is beyond all question ? Have we greater 
appetites than our forefathers ? Again, why are the wages 
of farm laborers lower in winter, when they are obliged to 
spend more for heating and clothing, than in summer, when 
food is so cheap and life in the country is so easy that Victor 
Hugo calls this the " poor man's season " ? 

But this law is sometimes interpreted in a broader sense. 
It is sometimes taken to mean, not the minimum amount 
of carbon and nitrogen necessary to keep body and soul 
together, but the minimum amount needed to satisfy the 
complex wants of man living in civilized society; this, of 
course, is a quantity that varies according to the stage of 
civilization which a society has reached. The law is some- 
times taken to mean that the wages of labor are governed 
by the habits and customs (the standard of living) of the 
working class to which a man belongs, and by the sum total 
of wants (physical and social, natural and artificial) which 
characterize the people among which he lives. If we are 

army which helps the employers, not the laborers, by necessarily reducing 
wages to the lowest competitive basis. This theory really brings us back to 
the law of supply and demand. 



504 PRINCIPLES OF POLITICAL ECONOMY 

agreed that this standard of living, instead of being an " iron 
law " is in reality elastic, changeable, fluctuating according 
to race, climate, and period ; and if, moreover, we are ready 
to admit that the standard of living necessarily and steadily 
tends to rise with every increase in the number of wants, 
desires, and exigencies of civilized men ; then the above 
formula is indeed applicable, but almost too optimistic, and 
promises more than we have any sound reason to hope for. 
In this interpretation we should speak, not of the " iron " 
law, but of the " golden " law of wages. 

Ask the disciples of Lassalle why the wages of French 
day laborers in rural districts were formerly so low that they 
lived on cheap brown bread and wore clogs, whereas now 
their wages permit them to eat better food and wear shoes ; 
and they will reply that these wages have increased precisely 
because the laborers have adopted new wants and a higher 
standard of living. Let us grant this for the sake of argu- 
ment. If, now, the laborers should adopt the habit of eating 
meat every day in the week and of wearing flannel shirts 
under their coarse coats, are we to take it for granted that 
their wages will rise enough to enable them to satisfy these 
new wants also ? If so, who could be more fortunate than 
they ? For in such a case the wages of the worker would 
not determine his manner of living; but, on the contrary, 
his manner of living would determine his wages. 

This roseate conception of the law of wages has been pre- 
sented by an American economist, Mr. George Gunton, in a 
book entitled "Wealth and Progress." Mr. Gunton argues 
that wages depend upon what the workingman considers the 
lowest level on which he can live. In this theory, competi- 
tion can reduce wages to the lowest limits he will work for, 
but not lower, because he will then starve rather than work, 
or organize a strike that will force up wages. A Chinaman 
receives low wages because he will live on a very low stand- 
ard. Economical living necessarily means scant wages, and 
a high standard of living means high wages. One way of 



THE PRODUCTIVITY THEORIES 505 

developing the workman's wants is by shortening his hours 
of labor, thus increasing his social and educational opportu- 
nities, and so raising his standard of living. For this reason 
Mr. Gunton is a warm advocate of the movement which aims 
to shorten the work-day. 

In reply to this theory, it is objected that laborers will 
lower their standard of living rather than starve, especially 
when there is an abundant supply of labor ready to take the 
place of those that insist on the higher standard. Machin- 
ery, moreover, is constantly discharging men whose particu- 
lar skill was necessary formerly, but whose work can now be 
accomplished by cheap labor, — even by the labor of women 
and children. In some skilled trades intelligent workmen, 
by means of labor organizations, may maintain a high stand- 
ard of wages and of living. But unskilled laborers cannot 
do anything of the sort. The principal argument against 
this theory consists, as we have indicated, in the fact that it 
mistakes cause for effect. Wages are not high because the 
standard of living is high, but vice versa. A man does not 
improve his standard of living with a view to increasing his 
wages ; he aims to increase his wages in order to live better. 
The man who wants to increase his wages usually does this 
by increasing his productivity, that is to say, his usefulness 
to those that employ him. When he has done this, his 
standard may be raised. 

§ 3. The Theories of the Productivity of Labor. 
A third theory, or class of theories, although likewise based on 
the application of the laws of value to the determination of 
wages, nevertheless reaches conclusions entirely different from 
those of the wages-fund theory and the iron law of wages. 

According to this theory the value of labor cannot be com- 
pared to that of any ordinary commodity subject solely to 
the law of demand and supply under free competition. The 
laborer is not merely a commodity,but an instrument of pro- 
duction; and the value of an instrument of production de- 
pends especially on its productivity. When an e?itrepreneur 



506 PRINCIPLES OF POLITICAL ECONOMY 

rents land, is not the price which he pays for its hire esti- 
mated according to the productivity of the land? Why, 
then, when he hires labor, should not the rate of wages be 
proportionate to the productivity of labor ? 

Although the idea that the productivity of labor determines 
the rate of wages was clearly set forth by Von Thuenen, the 
most striking form of the productivity theory is that given 
by Francis Walker in his book on "The Wages Question," 
and sometimes designated as the " residual claimant " theory 
of wages. 

Of course this theory does not maintain that wages will be 
equal to the total product of an enterprise. That would be 
impossible, inasmuch as there would then be no profit for the 
entrepreneur and he could not continue to employ laborers. 
But it does maintain that the workman receives as wages 
all that remains of the total product when the three shares 
(interest, rent, and profits) belonging to the other produc- 
tive collaborators have been deducted. These three shares 
are strictly determined in their respective amounts, whereas 
the worker's share possesses the advantage of not being fixed. 1 
In his relation to the other factors of production the wage- 
worker may be compared to a residual claimant or legatee 
who takes what is left when the other heirs have received 
their stated shares of an estate. 2 

lu The wages of a workingman are ultimately coincident with what he 
produces, after the deduction of rent, taxes, and the interest of capital." 
— Stanley Jevons. 

2 Walker's theory rose out of his protest against the wages-fund theory. 
Wages, says Walker, are not dependent on capital ; because men without 
capital can and do often employ labor, provided that they can know that the 
laborers employed will produce enough value to enable them to pay the labor- 
ers out of the product and leave a balance for the employer. Farm laborers 
sometimes receive merely their board until the harvest comes, whereupon 
they receive the rest of their remuneration. " The employer purchases labor 
with a view to the product of labor, and the kind and amount of that prod- 
uct determine what wages he can afford to pay." 

There are laws for rent, for profits, and for interest, definitely fixing the 
amount that can be claimed by landlords, employers, and capitalists. 




THE RESIDUAL CLAIMANT THEORY 507 

This theory, if sound, would be quite as encouraging as 
the wages-fund theory and the iron law of wages were dis- 
couraging. For if the rate of wages depends solely on the 
productivity of the workingman's labor, his welfare is entirely 
in his own hands. The more he produces, the more he will 
earn. Everything that increases his productivity — physical 
development, mental superiority, technical training, inven- 
tions, and machinery — will inevitably increase his wages. 

Whereas the wages-fund theory was too rigidly pessimis- 
tic, this doctrine is probably too optimistic. Yet both 
theories lead to similar conclusions with regard to the effec- 
tiveness of combinations among laborers. They both make 
it appear impossible for labor organizations to improve the 
condition of the working classes. For if the laborer is a 
residual claimant, it must be true of him, as it is of the resid- 
ual legatee of an estate, that he is powerless to increase or 
decrease his share in distribution. Walker, moreover, him- 
self makes the rather important qualification that the laborers 
will get this share, " unless by their own neglect of their 
interest, or through inequitable laws, or social customs hav- 
ing the force of laws," any one of the other three parties 
carries away something in excess of his normal share. 
Walker also points out that the laborer may lose his advantage 
by " weak, spasmodic, or unintelligent competition with the 
employing class." We may well ask, therefore, whether it 
does not follow that the laborer's share depends, in the last 
resort, not so much upon his residual claim as upon his 
power to have and to hold ? Does not the statement that an 
increase in the product goes to the laborer " by purely 
natural laws, provided only competition be full and free" 

"These three shares being cut off the product of industry, the whole remain- 
ing body of wealth, daily or annually created, is the property of the laboring 
classes, their wages, or the remuneration of their services. So far as by 
their energy in work, their economy in the use of materials, or their care in 
dealing with the finished product, the value of that product is increased, that 
increase goes to them by purely natural laws, provided only competition be 
full and free." 



508 PRINCIPLES OF POLITICAL ECONOMY 

contain an exceedingly important provision that is bnt rarely 
fulfilled in the case of labor ? 

In the light of this theory the wages contract would be 
even more advantageous to employees than actual partner- 
ship or profit-sharing ; because the workman, and only the 
ivorkman, would receive the entire increase in the product. 
The other collaborators in the productive process receive 
only fixed shares which tend, relatively speaking, to diminish. 

A simple enumeration of the conclusions to which this 
theory leads is sufficient to show how little, unfortunately, it 
is justified by facts. We are ready to admit that the pro- 
ductivity of labor influences the rate of wages by increasing 
the general wealth of a country ; that by thus augmenting 
the sum total of wealth for distribution it must ultimately 
increase the share that goes to each productive factor, and 
must therefore help to increase wages. We are also per- 
fectly willing to admit that the productivity of labor 
exerts a differential influence on the rate of wages : that is to 
say, whenever a particular laborer or a particular kind of 
labor is more productive than others, more wages are usually 
paid. But this theory leaves in the background one of the 
most essential factors of the problem, viz., the abundance or 
scarcity of labor, the effect of which is oftentimes prepon- 
derant. Consider, for illustration, the United States. The 
productivity of labor in this country has increased enormously 
during the past twenty years ; but the rate of wages, although 
it may be higher now than then, has by no means kept 
pace with the increased productivity of labor. Why not ? 
Because the number of proletarians in this country has been 
largely increased by the immigration of foreign laborers and 
by bringing all the available land under private ownership 
and cultivation. 1 This, in fact, is one reason why laws have 
been proposed for the purpose of restricting not only Chinese 
immigration but European immigration as well. 

1 " Wherever there is an abundance of free land, hired laborers find it easier 
to maintain a high standard of living. In this country it has been so easy 



MARGINAL PRODUCTIVITY OF LABOR 509 

There appear to be valid reasons for abandoning the pro- 
ductivity theory in the form given to it by Walker. But 
we do not hesitate to admit the element of truth con- 
tained in the "productivity" idea. An attempt has been 
made to elaborate this idea more scientifically by the econo- 
mists who accept the doctrine of final utility. (See pages 
54 ft. and 189 ff.) Indeed, it is maintained that the greatest 
importance of the final utility doctrine consists precisely in 
its applicability to the problems of distribution. The Ger- 
man economist, Von Thuenen, was not only the first to de- 
velop this doctrine as a scientific explanation of value, but 
he appears also to have been the first writer to apply it to 
the solution of the problems of rent, wages, and interest. 1 

According to this school of thinkers the rate of wages is 
determined by the marginal productivity of labor. There is 
in every industrial enterprise a point beyond which it will 
not pay the entrepreneur to hire more laborers. Additional 
laborers, like additional increments of any commodity, 
usually possess less value, less utility, than the preceding 
ones. (See the section on the Laws of Consumption.) 
Each new laborer furnishes a decreasing utility to the em- 
ployer, until a point is reached where the cost of an addi- 
tional laborer would be greater than the value resulting from 

for laborers to acquire fertile land and to engage in farming on their own 
account, that the supply of hired laborers has been reduced quickly and 
easily whenever wages have fallen below the income that could be secured 
from agriculture. In the future, American wages will be less affected by 
this influence." — Bullock, " Introduction to the Study of Economics." 

1 The translator of this work has endeavored, in an essay entitled " Thue- 
nen's Wertlehre" (Halle, 1896), to give Von Thuenen his proper place in 
the history of economic doctrines by regarding him as the real author of 
the theory of final utility. 

In the second part of his remarkable, albeit fragmentary, work, " Der Iso- 
lirte Staat" (1850), Thuenen developed theories of wages and interest. He 
had already developed a theory of rent in the first part of his book, published 
in 1826, before having cognizance of Ricardo's work. Throughout these 
theories of distribution the idea of marginal utility constituted a fundamental 
part of Thuenen's argument. 



510 



PRINCIPLES OF POLITICAL ECONOMY 



his labor. For a time, to be sure, the value of the product 
may increase more rapidly than the cost of labor ; and as 
long as this is true, we may speak of a "law of increasing 
returns." But sooner or later the point must be reached be- 
yond which it does not pay to employ additional capital or 
labor, because each increase in the amount of labor will mean 
a less than proportionate increase in the total value of the 
product. Thuenen illustrated this principle by an example 
drawn from agriculture, in which the point of diminishing 
returns is reached more rapidly than in manufactures. (See 
page 92.) Take, says Thuenen, the work of gathering the 
potatoes that have been raised on a given area of soil. Sup- 
pose the total quantity is 100 bushels. Obviously, it is 
never possible to gather all of the potatoes actually grown ; 
but by increasing the labor employed in digging over the 
soil, the proportion left in the ground may be reduced to a 
minimum. The results are indicated by the following 
table : — 



Laborers 
employed 


Bushels 
gathered 


Increase 


Laborers 
employed 


Bushels 
gathered 


Increase 


4 


80 




8 


96 


2. 


5 


86.6 


6.6 


9 


97.3 


1.3 


6 


91 


4.4 


10 


98.2 


0.9 


7 


94 


3. 









The intelligent farmer will continue to employ additional 
laborers only as long as each laborer produces more than the 
equivalent of his wages. If, in the above example, the wages 
of each laborer represent the value of one bushel, it will not 
pay the farmer to hire the tenth laborer. The employer's 
total profits are largest if he ceases to employ labor after the 
ninth person. To give the tenth man wages of one bushel 
for adding only nine-tenths of a bushel to the total prod- 
uct may be excellent philanthropy, but it is poor farming. 



THE LAST OR MARGINAL LABORER 511 

Should he continue to employ more laborers, despite the 
fact that each laborer costs more than his product is worth, 
he will ultimately be compelled to give up farming. And 
as most producers are engaged in business not for purposes 
of philanthropy, but for profit, every entrepreneur (whether 
he be a farmer or a manufacturer) will endeavor to find 
precisely the point at which profits are highest. 

The net profits of a concern are greatest when the number 
of laborers has reached (but not passed beyond) the point 
where the last laborer still produces more additional value 
than he costs his employer. If the labor of the last man is 
of the same kind as that of the others, — and we have sup- 
posed that it is, although the results of his labor are, of 
course, different because of circumstances beyond his con- 
trol, — it is evident that all laborers will receive the same 
wages, because different wages cannot be paid for like labor. 
These wages, moreover, cannot be greater than the produc- 
tivity of the last laborer employed. 

The term last or additional laborer, of course, does 
not mean the last laborer actually employed, for all the 
workers may be hired at the same time. What the term 
means may be made clearer by another illustration. 

Here, let us say, is a manufacturer who is sure of an ex- 
cellent market for a certain kind of goods. Suppose that he 
possesses all the necessary equipment and material for pro- 
duction — everything except labor. For such an entrepre- 
neur the first score of laborers would probably be extremely 
necessary, and produce an extremely valuable output. He 
could therefore afford to pay them, if necessary, very high 
wages. Probably it would still be profitable for him to em- 
ploy a second score of workmen ; but the resulting increase 
in the supply of goods would, in the long run, decrease the 
value of each article produced, for the very simple reason 
that an increase in the supply — other things being equal — 
must necessarily depress values. It must be particularly 
borne in mind that the workers of the second group possess 



512 PRINCIPLES OF POLITICAL ECONOMY 

precisely the same skill and ability as the first group. The 
value which their labor creates will, to be sure, be somewhat 
less than that of the first group. But this is due to no fault 
of theirs. It is the simple and natural consequence of eco- 
nomic forces from which there is no escape. In the example 
quoted from Thuenen it is not unlikely that the nine laborers 
were employed simultaneously; in such a case it would 
manifestly be absurd to pick out any particular laborer as 
the "last" laborer, or the laborer who "produces least," yet, 
to all intents and purposes, there is — logically, not chron- 
ologically — such a "last" laborer. 

We have already admitted that in manufactures the law 
of " increasing returns " may result in a more than propor- 
tionate gain for every additional laborer. It is quite possible, 
for instance, that whereas one laborer working alone pro- 
duces 4, and another working alone produces 4 also, both 
together may produce 10. Take either of them away, and 
the product is reduced by 6. It would, in this case also, 
manifestly be absurd to attribute a productivity of 4 to one 
laborer and of 6 to the other, or to maintain that the laborer 
who happened to be employed last in point of time produced 
less than the other. The employment of additional laborers, 
however, will, even in manufactures, ultimately find a limit 
beyond which it would be unprofitable for the entrepreneur 
to go. This point is reached when the product made by the 
"last " or "marginal " laborer (the latter term is less ambigu- 
ous than the former) will possess a value scarcely greater 
than the cost of his labor to the employer, i.e. his wages. 1 

1 The " marginal productivity theory " outlined above possesses the merit 
of easily explaining the close relation between labor and capital as factors of 
production. To a considerable degree, labor and capital may be substituted 
for each other. As a matter of actual business practice, the entrepreneur 
may often choose between employing more laborers or employing more capi- 
tal. The amount that he will employ of each of them depends partly on their 
utility and partly on their cost. (See the section on the Nature and Laws of 
Consumption.) Where labor is expensive and capital comparatively cheap 
{i.e. as compared with labor), the use of additional increments of capital 



PRODUCTIVITY OF LABORERS 513 

As, according to the law of indifference, there cannot be 
unequal wages for equal labor, the wages received by the 
"marginal" laborer (the laborer whom it just pays the 
entrepreneur to employ) must determine the wages paid 
to all Ihe other laborers of the same kind and the same 
ability. It may therefore be said that the wages of labor 
are indeed equal to the product of the laborer, but of the 
laborer who finds employment under the least favorable con- 
ditions. Dr. Stuart Wood summarizes the whole theory thus, 
" The price of all labor is regulated, as are the prices of all 
commodities, by its final utility ; by the utility, that is, of 
the portion which comes into use last ; that portion, in short, 
whose services are least useful and least highly valued." 

It is obvious that this theory is practically an extension — 
some writers would say a misuse — of the law of diminishing 
returns, which occupies so important a place in the theory of 
land rent. It is a wider application of the rent doctrine ; 
the advocates of the theory, and foremost among them Pro- 
fessor J. B. Clark, speak constantly of " distribution by a 
law of rent." 1 

The reader will recall that when we first discussed the 
problem of value (page 63), we could not point out the 
cause of value, for the simple reason that there are several 
causes. We must reach a similar conclusion with regard to 

will continue longer than where the reverse is the case. In our Western 
states, for example, it is found more profitable to employ capital than labor, 
whereas the conditions which prevail in Russia* for instance, would dictate 
the employment of more labor rather than more capital. 

1 To Professor Clark, in particular, is due the credit of having also pointed 
out the difference between a dynamic and a static theory of wages. The 
static theory explains wages on the supposition that the present economic 
forces continue to operate precisely as they do, without modification, and 
that free competition works in ideal perfection. " The static rate of wages, 
toward which actual wages are always tending, is fixed by the productive 
power of labor itself, and whatever changes that productive power raises or 
lowers this standard. Workingmen are creating daily certain amounts of 
wealth; and if the changes and disturbances that social progress implies 
should cease, and if certain causes of friction were removed, every man 



514 PRINCIPLES OF POLITICAL ECONOMY 

wages, and admit that there is probably not one determinant 
of wages, but several, operating with varying degrees of in- 
fluence at different times and under different circumstances. 
All the forces that influence the value of merchandise also 
affect the value of manual labor. There are, moreover, other 
determinant influences peculiar to wages, — such as public 
opinion, threatened strikes, and, above all, the growing con- 
sciousness among workers of their rights and their social 
importance. 

IV. The Increase of Wages 

The gradual increase of wages during the past century 
seems beyond question. Innumerable statistics from all 
countries show that wages in agriculture as well as in man- 
ufactures have been more than doubled during the nine- 
teenth century. There is, to be sure, much difference of 
opinion among statisticians with regard to the precise extent 
of the increase of wages. And in view of the almost insur- 
mountable difficulties involved in the collection of reliable 
wage statistics, it is questionable whether the cautious 
economist can attach any scientific value to the wage and 
price statistics published from time to time by various 
authorities, official and unofficial. The Twelfth Census 
of the United States refrains scrupulously from drawing 
any conclusions with regard to the probable rise or fall in 
wages from 1890 to 1900. 1 

would get, as his pay, the amount that he actually produces. Ten years 
hence men will work in a different manner and with different appliances, 
and if we could then stop the influences of change and let competition again 
do its full work, we should find them getting amounts that would correspond 
to their changed powers of production." ("The Dynamics of the Wages 
Question," Proceedings of the American Economic Association, February, 
1903.) 

1 See Vol. VII of the Twelfth Census, pp. cxi ff. Concerning the diffi- 
culties encountered in getting, and in making any scientific use of, wage 
statistics, the reader should consult an article by Professor Mayo-Smith 
in Vol. I, No. 1, of the Political Science Quarterly, and the same author's 
"Statistics and Economics." An article on this subject, bringing out 



INCREASE OF WAGES 



515 



According to the celebrated Aldrich Senate Report of 

1893 the relative rate of wages in the United States, 1 in 

all occupations, from 1840 to 1891 (taking the rate in 
1860 as equal to 100), fluctuated as follows : — 



Period 


Single 
Average 


Average 
according to 
Importance 


Period 


Single 
Average 


Average 
according to 
Importance 


1840-1844 . . 
1845-1849 . . 
1850-1854 . . 
1855-1859 . . 
1860-1864 . . 
1865-1869 . . 


87.2 
90.2 
92.3 
98.9 
108.0 
154.9 


82.5 
89.6 
92.6 
98.5 
111.4 
160.1 


1870-1874 . . 
1875-1879 . . 
1880-1884 . . 
1885-1889 . . 
1890-1891 . . 
(2 years) 


164.1 
147.6 
148.7 
153.5 

159.8 


165.8 
146.7 
152.2 
157.8 
168.4 



This, apparently, is an enormous increase. Yet we must 
not overlook a number of circumstances which make the 
increase less considerable, and less beneficial than we should 
at first suppose it to be. We have already pointed out, in 
a previous section of this chapter, that in ascertaining the 
actual condition of laborers, several important matters must 
be taken into consideration. 

(1) In the first place, this increase of wages is partly nomi- 
nal, and due in a measure to the depreciation of money. 
Should money lose half its purchasing power, what does it 
matter to the workman if his wages have increased from $1 
to $2 per day ? He has really gained nothing by the change. 

Price statistics are therefore the indispensable complement 
of wage statistics. But in getting and in employing price 

various conflicting results with regard to the actual changes in the rate of 
wages is contained in Bliss' "Encyclopedia of Social Reform." 

1 The French Labor Bureau (Office du Travail) prepared the following table 
for the Paris Exposition in 1900, showing the increase of wages in France 
during the nineteenth century. (The rate for 1892 is taken as equal to 100.) 

1860 70 

1880 ...... 98 

1892 100 

1900 103 



1806 . . . 


... 45 


1830 . . . 


... 49 






1856 . . . 


... 61 



516 PRINCIPLES OF POLITICAL ECONOMY 

statistics as the basis for scientific inferences we are met with 
quite as many difficulties as in the case of wage statistics. 
Satisfactory records of prices are, from the nature of the case, 
records of wholesale prices, while the laborer's expenditure is 
a retail expenditure, and retail prices vary from time to time 
and from place to place in the most arbitrary fashion. Vari- 
ations in the general purchasing power of money, therefore, 
give us no certainty with regard to the changed purchasing 
power of a workman's wages. There may have been a general 
decline in prices simultaneous with a rise in the price of food 
or fuel or some other equally important article of the laborer's 
budget. (See the section on the Nature and Laws of Con- 
sumption.) In any estimate of the changed purchasing 
power of wages, we must be careful not to attach equal im- 
portance to the prices of all commodities, but to give excep- 
tional weight to those commodities which are the laborer's 
principal items of expenditure. 

There seems but little doubt that money has lost some of 
its value during the past century, and that this depreciation 
of money has caused a general rise in prices. About 1870, 
however, the rise in prices seems to have ceased for a while, 
and temporarily given place to a fall. Since 1897, on the 
other hand, there has been an almost uninterrupted rise of 
prices. 1 But the workman is most concerned with the prices 
of those goods which figure largely in his budget. Certainly 
a large number of food products, such as meat, vegetables, 
and butter, have increased in price. The cost of renting 
houses and apartments has also increased. All of these things 
play an important part in the laborer's expenditure. Bread, 
on the other hand, which is quite as important an item, has 
not increased in price. As we shall point out later, in dis- 
cussing the laws of consumption, the smaller the income the 
greater is the relative importance of the price of food for the 
workingman's family. Thus, in families having an annual 

1 The Course of Wholesale Prices from 1890 to 1902 is the subject of Bul- 
letin No. 45 of the Department of Labor (March, 1903). 



INCREASE OF WAGES 



517 



income of less than 8200, food constitutes about half the 
total expenses, whereas in families having $1200 or over, it 
represents only one-fourth of the total consumption. We 
should also note that there has been a fall in the price of 
many important commodities ; among these are sugar, spices, 
and manufactured goods, such as clothing and furniture. 
Still more remarkable has been the decrease in the cost of 
transportation, correspondence, and education. 

Having already given the wage statistics reported by the 
Aldrich Senate Committee, we quote the price statistics 
given by the same authorities. These tables give the relative 
prices (in gold) by five-year periods; the second column gives 
the price for all articles simply averaged; the third column 
averages the price of all articles according to their relative 
importance as estimated by the committee's statisticians. 
To facilitate comparison, we give the wage statistics in the 
fourth column. 



Period 


Prices 

(averaged) 


Prices 

(estimated) 


Wages 
(gold) 


1840-1844 


108.8 


93.9 


87.2 


1845-1849 . 










103.2 


93.3 


90.2 


1850-1854 . 










106.6 


99.4 


92.3 


1855-1859 . 










108.2 


107.1 


98.9 


1860-1864 . 










108.1 


95.3 


91.6 


1865-1869 . 










118.7 


103.9 


105.3 


1870-1874 . 










121.8 


109.4 


145.4 


1875-1879 . 










103.8 


102.0 


138.5 


1880-1884 . 










105.3 


104.4 


148.7 


1885-1889 . 










93.2 


96.7 


153.5 


1890-1891 . 










92.3 


96.0 


159.8 



It is probably not far from the truth to assume that the cost 
of living for the average workingman's family has increased 
about one-third since the beginning of the nineteenth cen- 
tury ; and as wages have increased considerably more than 
this, we may logically infer that the condition of the work- 
ingman has improved, — his real ivages have increased. 



518 PRINCIPLES OF POLITICAL ECONOMY 

(2) The increase in wages, though real, has not been pro- 
portionate to the growth of general prosperity . In other words, 
the wages of labor have increased more slowly than the income 
of the other classes of society. Suppose that the social sur- 
plus divided between laborers and capitalists fifty years 
ago was two billion dollars, each class receiving one billion. 
Suppose that to-day the surplus has increased to four billion, 
of which the laboring classes get one and one-half billion 
and the capitalists two and one-half billion. In this case 
the increase of wages, though real, would not mean a genuine 
improvement in the condition of laborers, their share having 
increased but 50 per cent, while that of the capitalists has 
grown 150 per cent, or three times as rapidly. To be sure, 
the wage-earners would be better off than before, absolutely 
speaking. But they would not feel any richer than before, 
because riches are purely relative. The nature of man is 
such that even prosperity, if in strong contrast with the 
greater prosperity of those around him, may seem like 
poverty. 

From the standpoint of social justice we must admit that 
the laboring class is entitled, not only to a positive improve- 
ment in the conditions of life, but also to an increase of 
income at least proportionate to that of the other social 
classes. Statistics, however, seem to show that the income 
of the working classes has not kept pace with the general 
growth of wealth. 1 

1 The total wealth of France, for example, appears to have increased six- 
fold during the nineteenth century, — an increase manifestly much greater 
than that of wages, inasmuch as the latter have only doubled during the 
same period. Yet, as Professor Paul Leroy-Beaulieu has pointed out, this 
great increase of national wealth is partly an apparent increase of capital, 
not a real increase, because of the changed rate of capitalization, which is 
in turn due to a fall in the rate of interest. An independent income of, say 
$3000, from the ownership of government bonds or other securities, was 
capitalized thirty years ago at $60,000, whereas it is now valued at $100,000 
because the rate of interest has fallen from 5 to 3 per cent. Yet the income 
which goes to the owner of these securities is really no greater now than 
then. 






INCREASE OF WAGES 519 

(3) It should be noted, finally, that the " average wages " 
given by statistics are assumed to be paid regularly through- 
out the year. But in many trades there are frequent periods 
in which it is impossible for the wage-earner to be engaged 
productively ; these periods of obligatory inactivity are called 
dead seasons. Again, there are large numbers of workmen 
who cannot find employment of the kind for which they are 
fitted, and who therefore do not earn any wages at all during 
part of the year, or who must turn to lower occupations with 
poorer pay. A large number of laborers, moreover, are em- 
ployed only part of the week, or part of the day, or are 
frequently "laid off " for considerable periods. 1 The danger 
of "losing work" threatens the laborer constantly; unem- 
ployment is becoming a chronic ailment of our present 
economic system, and may involve an enormous reduction in 
the annual wages actually received by the laborer. This 
danger is all the greater when, as we shall see is now the 
case, there is no effective means for providing against it. 

Is this rise of wages due to natural or to artificial causes ; 
that is to say, has it taken place spontaneously, or is it due 
to the influence of laborers, or to that of the government, or 
perhaps to that of the employers themselves ? 

The uncompromising members of the classical school do 
not believe in the existence of artificial means for increas- 
ing wages, any more than they believe in artificial means for 
raising prices. They maintain that the rate of wages is 

1 Mr. Carroll D. Wright, United States Commissioner of Labor, and cer- 
tainly a conservative authority for matters of this sort, said, in 1886, that 
there are probably one million unemployed persons in the United States at 
any one time. Even laborers who have regular employment are out of work 
for months at a time. In Massachusetts in 1885 the average loss from this 
source for all the employees in the state was five weeks in the year. In 1886, 
reports concerning 85,329 representative workingmen showed an average time 
at work of 37.1 weeks, or only 71.3 per cent of full time. In England, Bax- 
ter estimates that the great body of working people are employed from 41 
to 44 full weeks per year. 



520 PRINCIPLES OF POLITICAL ECONOMY 

determined by natural laws, and for this reason is beyond 
the influence of human intervention. To suppose that a 
labor organization, or the decrees of law, or even the gen- 
erosity of an employer can cause an increase of wages, is 
as puerile as to suppose that we can cause fine weather by 
shaking the barometer. There are, to be sure, cases in which 
a successful strike has been followed by an increase of wages. 
But, the ultra-liberals declare, in such a case wages were 
bound to rise anyway. A strike may act in much the same 
way as a light tap on the glass of a barometer, causing the 
instrument to adjust itself a trifle more readily to the forces 
operating on it and therefore to take its proper position more 
quickly. They declare, — abandoning the figure of speech,- — 
that all we can do is to make labor more mobile, quickly 
transferable from one place to another, or from one occupa- 
tion to another, by giving the widest possible scope to the 
law of demand and supply. This alone is sufficient to cause 
the price of labor to rise gradually, as the result of that 
general increase of wealth which naturally takes place in 
prosperous communities. 

A proof of this, they maintain, lies in the fact that the 
increase of wages has by no means been confined to occupa- 
tions in which there are most strikes. On the contrary, it 
has come to workers who never strike at all, and who are 
not even organized ; e.g. agricultural laborers and domestic 
servants. 

There is no doubt that the increase of wages during the 
nineteenth century is due largely to natural causes, or rather 
to economic causes which may be summed up in the phrase : 
increased productivity and increased general wealth. But 
there are also other causes, foremost among which is the 
growing and deepening sentiment on the part of working- 
men that they are entitled to an increasing share of the 
wealth which they have helped to produce. We must not 
forget that fixing the price of manual labor, like fixing the 
price of any other commodity, always pre-supposes a certain 






SHORTENING THE WORK-DAY 521 

amount of higgling ; and if the two parties to the transaction 
are of unequal power or knowledge, the greater advantage 
will always accrue to the stronger party. The intervention 
of law, the influence of labor organizations, and sometimes 
strikes, are effective means of accomplishing a new and more 
favorable adjustment of wages. 

V. Shortening the Work-day 

Wages are only one aspect of the worker's life ; the length 
or quantity of labor is quite as important a matter. The 
worker's condition may be improved by reducing his work, 
as well as by increasing his pay. 

Shortening the work-day is one of the reforms to which 
great importance is now attached. Socialists regard it as a 
means of emancipating the laborer, of liberating him from 
the exploitation of employers, and of preparing him for the 
social and political struggle for class supremacy. Laborers 
generally regard this reform as meaning less work with the 
same wages, — perhaps with even higher wages, because of 
the artificial scarcity of labor resulting from less hours of 
work. But the greatest significance of this movement lies 
in the fact that it gives increased opportunity for the in- 
tellectual, moral, and even physical improvement of the 
laboring classes, by providing the leisure necessary for re- 
creation, that is to say, by enabling the workers, during a 
greater part of each day, to cease being mere productive 
machines and to become men. A man's trade should not be 
his sole occupation ; some time and attention should be de- 
voted to home life and to the occupations of citizenship. 

It is often said that modern business relations are so com- 
plex, and competition among modern nations so intense, that 
it would be difficult for one country to shorten the day of 
labor without placing itself in a position of exceedingly dan- 
gerous competitive inferiority. An effort has therefore been 
made to reach some international agreement among civilized 



522 PRINCIPLES OF POLITICAL ECONOMY 

nations with regard to the hours and conditions of labor; 
but this international problem is much more difficult of 
solution. 1 Without doubt, international regulation of such 
matters as this is desirable ; but each nation should not make 
this a pretext for waiting until others take the first step. 
Experience lias demonstrated that countries which are 
ethically far enough advanced to limit the hours of work 
are also sufficiently advanced industrially not to fear the 
competition of countries having longer work-days. 

This problem, however, cannot be solved without due 
reference to the sex and age of the individual worker ; we 
cannot apply the same principles indiscriminately to the labor 
of men, women, and children. 

§ 1. Child Labor. All civilized countries, with but a few 
shameful exceptions, forbid the employment of young chil- 
dren in factories and workshops. But the age limit, below 
which children are not allowed to work, varies from nation 
to nation, and in the United States from state to state. 
" The underlying idea is that children should be withdrawn 
from the stunting influence of confinement in workshops ; 
and that they should attend school and become fitted for 
future usefulness." 

Usually the law provides that no child under ten years of 
age shall be employed, and that those from ten to fourteen 
must have a certain amount of schooling and a sufficient 
amount of time for rest and recreation. For these, as well 
as for " young persons " aged from fourteen to eighteen, 
there are limitations with regard to the number of hours per 
day, interruptions for rest and meals, the allowable amount 

1 In April, 1890, an international conference on labor questions, called by 
the Emperor of Germany, met at Berlin. The conference passed a series 
of resolutions ; but having no power to bind the nations represented at the 
conference, they have continued to be merely desiderata. 

In 1900, an International Association for the Legal Protection of Workers 
was founded at Paris, at the instigation of several French and Belgian pro- 
fessors of political economy. The central office of this organization, which 
meets annually, is at Bale, Switzerland. 



CHILD LABOR 523 

of " overtime," and rest on holidays and Sundays. Certain 
dangerous or unhealthful occupations are sometimes entirely 
forbidden to children and minors, and night- work is in most 
occupations not allowed to persons of less than eighteen years 
of age. 1 

It must not be supposed, however, that these humanitarian 
limitations on the labor of children were enacted without 
opposition. The campaign against child labor, begun in 
England in 1802, was not successful until 1844, thanks to 
the heroic perseverance of the Earl of Shaftesbury. " The 
beginning of the present century," says Francis Walker, 
"found children of five and even three years of age in 
England working in factories and brick-yards; found the 
hours of labor whatever the avarice of individual mill-owners 
might exact, were it 13, 14, or 15 ; found no guards about 
machinery to protect life and limb; found the air of the 
factory fouler than language can describe, even could human 
ears bear to hear the story." As there were practically no 
facilities for boarding the thousands of children that were 
herded together in the factory towns of England, " apprentice 
houses " were built for them, — miserable barracks where they 
were placed under the care of superintendents or matrons. 
When the demands of trade were active they were often 

1 A statement of the per cent of children employed in the United States is 
given on page 135, note 2. The last census states that in 1900 there were 
1,755,210 persons between 10 and 15 years of age employed in gainful occupa- 
tions. These figures are probably much too small ; recent investigations in 
several states indicate a much larger number than the census reports. The 
student will find a somewhat too optimistic discussion of this matter in 
Carroll D. Wright's " Practical Sociology " (1902). 

A summary of European labor laws may be found in Volume XVI of the 
Report of the U. S. Industrial Commission (1901) and in Emma Brooke's 
"Tabulation of the Factory Laws of European Countries" (London, 1898). 
A summary of our own labor laws may be found in Volume V of the Report 
of the U. S. Industrial Commission (1900) and the second special report of 
the U. S. Commissioner of Labor for 1896, supplemented by the bi-monthly 
bulletins of the Department of Labor. These bulletins also contain (Nos. 25, 
26, 27, 28, 30, and 33) excellent sketches of the labor legislation of foreign 
countries, written by W. E. Willoughby. 



524 PRINCIPLES OF POLITICAL ECONOMY 

arranged in two shifts, each working twelve hours, one set 
climbing into bed as the other got out. They were fre- 
quently required to snatch their coarse food while the 
machinery was in motion, and much of the time which 
should have been devoted to rest was spent in cleaning the 
machinery. 1 

The adversaries of laws against this state of affairs argued 
that it was the business of the parents to look after their 
children, not that of the state. Although there may have 
been some exaggeration in the extremely sombre picture 
drawn by the advocates of factory laws, there can be no 
doubt that there was a most abominable traffic in the labor 
of children, conducted on a very large scale. 

§ 2. The Labor of Women. In the case of women the 
problem is more difficult. With the introduction of ma- 
chinery under the so-called factory system, it became possible 
and profitable to employ the labor of women, which is 
cheaper than that of men. So many occupations, moreover, 
have recently been thrown open to women that there has 
been a rapid increase in the proportion of females to the 
whole number of persons engaged in some of the principal 
trades and professions. 2 The fear has therefore been some- 
times expressed that women are crowding men out of 
employment. 

Some persons have advocated the entire exclusion of women 
from factories and workshops. They urge, in favor of this 

1 See Cheyney's " Industrial and Social History of England" (Macmillan, 
1901). 

2 Harriet Martineau in 1840 found only seven employments open to 
women — teaching, needle work, keeping boarders, working in cotton mills, 
in book binderies, type-setting, and household service. 

In the United States, women artists and teachers of art increased from 
10. 10 per cent of the total in 1870 to 44.3 per cent in 1900. In the occupations 
of book-keepers, clerks, and saleswomen, the rise was from 3.47 per cent in 
1870 to 21 per cent in 1900 ; in telegraph and telephone operators from 4.27 
per cent to 30.1 per cent in the same period. Of the whole number of public 
school teachers in the United States 69.7 per cent, and in some of the New 
England states more than 91 per cent, are women. 



LABOR or WOMEN 525 

measure, that the industrial employment of women destroys 
the family and the home, gives rise to a terribly high death- 
rate among the children of women thus employed, and exposes 
women and girls to morally and physically pernicious influ- 
ences ; in the case of pregnant women, the health of the 
mother and child is jeopardized, and the risk of abortion and 
still-births is greatly increased. 

But, on the other hand, it should be urged that at a time 
when so much is being said in favor of the emancipation of 
women and the equality of the sexes, it would be strangely 
illogical to prevent women from earning a living by their 
own labor. Unmarried women find it hard enough now to 
earn an honest living ; their condition would certainly not be 
improved by closing the factory doors to them. It would be 
necessary, at all events, to exempt from this prohibition all 
those women who have no husbands or children, and who conse- 
quently have no one to support them. 1 The outcome of this 
discussion, therefore, is a sort of compromise. Women are 
usually not forbidden to work in factories, but in many 
countries they are not allowed to engage in certain danger- 
ous or objectionable kinds of labor, such as mining ; in some 
countries night-work, and work during a period of several 
weeks after child-bearing, are likewise prohibited. 

There is no general law in any of the United States limiting 
the hours of labor of adult women; but fifteen states limit 
the length of female labor in factories and mechanical or 
industrial occupations, — usually to 10 hours a day and 60 
hours a week. 

§ 3. Adult Male Labor. In the case of adult males the 
problem of legal limitation is even more difficult. It is, 
of course, entirely out of the question to forbid their labor in 
factories. The question is whether it should in any way be 

1 To do this would, however, probably discourage marriage and legitimate 
maternity, and this would be the worst possible measure for such a country 
as France, for example, in which there are even now too many bachelors and 
too many sterile marriages. 



526 PRINCIPLES OF POLITICAL ECONOMY 

limited or restricted. The liberal school argues that adult 
individuals ought to be entirely free to regulate the use of 
their time and of their labor, and that they are the best 
judges of their own interests. But to this assertion we may 
reply that, as a matter of fact, under the present system of 
large-scale production, this liberty is impossible. The 
laborer must start work when the factory whistle blows ; he 
must stop when the factory stops. No matter what may be 
his own desire in the matter, he must work the number of 
hours exacted by the employer, or, rather, the number 
required by custom or by competition. There is no scope 
for the choice or the liberty of the individual laborer. The 
question, therefore, is whether or not a reduction of 
hours would contribute to the welfare of the working 
class as a whole, and whether, considering the question in 
a still wider aspect, such a reduction would result in an 
improvement of the human race. The experience of 
countries in which this reduction has already been carried 
out seems to furnish conclusive evidence on this point. 

We are naturally disposed to believe that a decrease in 
the hours of labor would necessarily mean a diminution of 
the product and a fall in wages. This, in fact, is the usual 
objection to shortening the work-day. Actual experience 
along this line, however, proves quite the contrary. Labor- 
ers who work for a shorter period, who are less exhausted 
by long-continued labor, and who have more time for intel- 
lectual, moral, and physical development, will produce more ; 
and if they produce more, it is extremely improbable that 
their wages will be diminished. As a matter of fact, the 
countries in which the day of labor is shortest (Australia, 
England, and the United States) are also those in which the 
highest wages are paid and in which the product per laborer 
is greatest. 1 

1 This theory must not, of course, be carried to the absurd extreme of 
maintaining, as socialists are in the habit of doing, that the shorter the work- 
day the greater the product. Socialists sometimes also advance contradict- 



ADULT MALE LABOR 527 

Limitation of the hours of labor by law, however, is 
still the exception rather than the rule. France set the 
example more than half a century ago by the law of 1848, 
which fixed the maximum daily period of labor at twelve 
hours. But this law, which was then far in advance 
of economic evolution, remained a dead letter until quite 
recently. 

In the United States numerous statutes have been enacted 
regulating the hours of labor, although as a rule the courts 
are inclined to insist that the law shall not interfere in the 
purchase and sale of labor more than in dealings in any 
other commodity. Many of the state laws, therefore, merely 
fix what shall be regarded as a full day's labor in the 
absence of any contract between the parties ; others, under 
the police power of the state, fix the hours of labor in occu- 
pations specially dangerous or unsanitary, or in which the 
safety of the public is specially concerned. Seven states 
have passed laws declaring that eight hours shall be 
regarded as a lawful day's work in general occupations 
unless otherwise expressly agreed. In six states the time is 
fixed by statute at ten hours. The hours of labor in work 
done directly for the state or any municipal corporation 
have been limited in many states, as well as by act of Con- 
gress, which has power to prescribe hours of labor on gov- 
ernment works although territorially they are not within its 
jurisdiction. 

Laborers themselves naturally advocate a shorter work- 

ory arguments by asserting, on the one hand, that shorter work-days will 
make labor more productive, and, on the other hand, that shorter work- 
days will give employment to a larger number of laborers, and thus do away 
with the " army of unemployed." It is perfectly obvious that if a shorter 
work-day does not curtail the product, there will be no need for employing 
additional laborers. These two arguments are incompatible. 

The truth of the matter is that a shorter work-day may very well be 
accompanied by an increased intensity of labor, and, consequently, increased 
productivity. But this result can be attained only among exceptional, 
highly civilized peoples, capable of very intense labor, and in countries pos- 
sessing very complete industrial equipment. 



528 PRINCIPLES OF POLITICAL ECONOMY 

day than is now customary. Like the old English song, they 

want 

"Eight hours for work, eight hours for play, 
Eight hours for sleep, and eight shillings a day." 

This minimum, however, has nowhere been established by 
law ; and as a matter of fact the eight hour work-day exists 
in very few countries. 1 



VI. Trades Unions 

Under ordinary circumstances the workman who deals 
individually with the employer is at a considerable disad- 
vantage. There are three reasons for this : — 

(1) The capitalist can wait, whereas the laborer cannot. 
The latter possesses a commodity which he must sell in 
order to live ; this commodity is his labor. 

(2) As a rule, the entrepreneur can get along without the 
workman, when the latter stands alone, whereas the work- 
man cannot readily dispense with the employer. It is an 
easy matter to find another laborer ; laborers can be 
imported from abroad, if need be, or their place can be 
taken by a machine. But it is not so easy to find a new 
employer ; employers cannot be induced to come where the 
laborers want them, and we have not yet discovered a 
machine that will take their place. 

1 In England the day of labor is usually nine hours long ; in the United 
States, from eight to nine hours ; in Australia it has been eight hours since 
half a century ago. These limitations, however, are not due to law, but to 
the influence of labor organizations. 

The eight-hour day was obtained by the working classes in Australia 
sooner than in the United States or in England because of the great distance 
which separates Australia from other civilized countries, and which protects 
it to some extent from the competition of foreign labor. 

There are a number of countries which, like the United States, limit the 
number of hours per day for the labor of government employees. This limi- 
tation, however, does not apply to labor under private contract, — a circum- 
stance which we must be careful not to overlook. 



LABOR ORGANIZATIONS 529 

(3) The entrepreneur is more familiar with the condition 
of the market ; he has better opportunities for grasping the 
whole economic situation and taking advantage of it. It is 
easy for him to reach an understanding with his competi- 
tors, or at least to know what they are doing. 

For these reasons the labor contract was for a long time a 
free contract in name only. As long as workmen are 
obliged to deal individually and separately with the head of 
a large industrial concern, they cannot protect their own 
interests or even debate the rate of wages. All they can do 
is to accept or refuse the terms offered by the employer ; 
and under the pressure of want they are obliged to agree to 
the employer's proposition. 

But when laborers in the same trade form an organiza- 
tion, employer and employee are more likely to be on an 
equal footing, for the following reasons : — 

"(1) Labor organizations enable the workman to refuse to 
work when the terms of employment are unsatisfactory ; 
they support him, during the period of unemployment, by 
means of clues or assessments contributed by the members of 
the organization. When these organizations possess sufficient 
means, they set aside a fund for the support of unemployed 
members, in order to prevent workmen from being obliged 
to accept the unfavorable terms offered by employers. 

(2) Labor organizations unite all the workmen in each 
branch of production ; hence, the employer cannot deal with 
individual laborers, but must transact with a whole group 
of laborers or their representatives. The individual labor 
contract, which ought not to be called a " contract " at all, 
thus gives way to collective bargaining. 

(3) Labor organizations provide, so to speak, bureaux of 
information for laborers ; they make it possible for them to 
have competent and experienced leaders, who are quite as 
capable of familiarizing themselves with the industrial situ- 
ation as the employers, and who are therefore able to pre- 
vent unwise conduct on the part of the laborers. 



530 PRINCIPLES OF POLITICAL ECONOMY 

To the economists who maintain that trades unions can- 
not arbitrarily fix the rate of wages, we must reply that this 
is not their purpose. All they seek to do is to obtain the 
wages justified by the general state of the market, and not 
the rate determined by certain accidental circumstances, 
such as the relative poverty of the laborers and the dire 
want of food that sometimes obliges them to accept the 
employer's terms. 

Yet the right to meet together and to form associations 
for the defence of their interests and the improvement of 
their condition has but recently been acquired by the labor- 
ing classes of most countries. Ordinarily, the first step 
accomplished by the working classes was the acquisition of 
the so-called right of coalition, i.e. the right to act as a unit 
in demanding certain terms of employment, and in case of 
refusal, to abandon work and to "strike." This privilege 
was granted in England in 1824, and in France by the Law 
of 1864. 1 In Russia it has until quite recently been a mis- 
demeanor for employees to strike. It appears that strikes, 
in themselves, have never been illegal in the United States. 

But the right merely to act jointly is not enough ; for 
in order to be effective, the claims of laborers must be 
backed not only by an occasional and temporary agreement 
among themselves, but by permanent understandings 
through the medium of labor organizations. The right to 
organize permanent associations of this nature was not 
granted by law in England until 1871, and in France until 
1884. 

Associations of laborers belonging to the same trade are 
not new institutions, but date from the Middle Ages. Their 
prototype, however, was not the mediaeval guild, properly 
speaking, — for the guild was generally composed only of 
masters', and therefore resembled the modern employers' 

1 A "lockout" may be defined as a strike on the part of employers, 
when they determine to close their establishments until the employees accept 
such terms as the employers choose to offer. 



ENGLISH TRADES UNIONS 531 

syndicate, — but the journeymen's corporation or guild, com- 
posed of workers who were not allowed to enter the guild 
proper. Associations of this sort, old as they are, have only 
recently begun to play an important part in the economic 
field. In England and in Austria, labor organizations have 
acquired great prominence because of their admirable organi- 
zation. In English-speaking countries they are commonly 
called trades unions. 

England is the classic country of trades unions. At 
the beginning of the year 1902, there were 1236 trades 
unions in England, having 1,922,780 members. Of this 
number, 120,078 were women, 90 per cent of whom 
were employed in the textile industries. Only 4 per cent 
of the laboring women are organized, but more than one- 
fourth of the male workers belong to trades unions. These 
organized male laborers are very unequally distributed 
among the various trades ; there are few of them in the 
food-producing occupations and among tailors, whereas the 
Amalgamated Society of Engineers, for instance, has over 
90,000 members. Many of the English trades unions are 
wealthy organizations, grouped into powerful federations, 
directed by prudent and distinguished men, some of whom 
have been elected to the House of Commons. Their great 
Annual Congresses are events of much public importance. 
Until recently, they have not lent their influence to the 
propagation of socialistic ideas, but have devoted themselves 
to the more practical task of increasing wages or reducing 
the hours of labor without asking for government interven- 
tion. They have been moderate in the use of strikes as a 
method of industrial conflict, preferring to employ the 
greater part of their funds to provide assistance for unem- 
ployed, sick, or disabled members, or for those who are too 
old to work. 1 In fact, the conservative spirit of the older 

1 In 1901, one hundred of the most prominent English trades unions had 
an income of about $10,000,000. Their expenditures during the same year 
were divided as follows : payments to sick and injured members, $1,700,000; 



532 PRINCIPLES OF POLITICAL ECONOMY 

unions, composed chiefly of skilled workmen, has exposed 
them to the charge of attempting to build up an aristocracy 
of laborers and of having no sympathy for unskilled and 
unorganized labor. 

Since the famous London dock-laborers' strike in 1889, the 
unionist movement has extended to the ranks of unskilled 
laborers, who have formed numerous organizations, with lim- 
ited resources and showing a pronounced tendency toward 
socialism and active participation in politics. This tendency, 
sometimes called " the new unionism," has brought the 
trades unions into closer sympathy with government inter- 
vention and collectivism, — especially the nationalization of 
land and mines. 

In respect to the strength of labor organizations, the United 
States, to say the least, now begins to rival Great Britain. 
The beginnings of American trade-unionism are unknown, 
but there appears to have been an association of journeymen 
shoemakers in Philadelphia as early as 1792. Most of the 
organizations founded before the Civil War were purely 
local. The National Labor Union, organized in 1866, as well 
as several subsequent attempts to establish a general associa- 
tion of laborers, enjoyed but a brief and precarious existence. 

The first general organization to acquire national promi- 
nence was the Knights of Labor, started in 1869. This 
order aimed to unite all workingmen in one great organiza- 
tion, with the key-thought that " an injury to one is the 
concern of all." By 1886 the organization had a member- 
ship of over 500,000. Its growth, in fact, was too rapid. The 
order, moreover, showed too little respect for the autonomy 
of each craft, and its leaders undertook to exercise dictatorial 
powers. Hence a violent reaction set in, and some of the 
trades unions organized a Federation of Trade and Labor 

to members without employment, $1,600,000 ; for carrying on strikes, 
$1,000,000; old age pensions, $1,000,000; funeral expenses of deceased 
members, $500,000. The average dues per member, in these unions, was 
about $8 per annum. 



THE AMERICAN FEDERATION OF LABOR 533 

Unions, which later became the American Federation of 
Labor. This Federation, now the greatest labor organiza- 
tion in the country, recognizes the autonomy of the separate 
crafts, but federates them for purposes of strength. In 1894 
the socialists endeavored to commit the Federation to a plat- 
form of complete socialism, but their efforts met with no 
permanent or important success. In the latter part of 1902, 
the Federation included nearly 1800 local and city trades 
unions, with an aggregate membership of 2,000,000; it pub- 
lishes over 200 weekly and monthly papers devoted to the cause 
of labor, and officially declares its object to be to render employ- 
ment and the means of subsistence less precarious by securing 
to the workers an equitable share of the fruits of their labor. 

Several national unions, however, are not affiliated with 
the American Federation of Labor; their total membership 
is probably about 300,000. The Knights of Labor now 
number not more than 40,000. In addition to these 
national labor organizations, there are international as- 
sociations of workingmen, and also trades unions that are 
confined to particular localities. The typical local union 
includes only members who live and work in one town, and 
its business is done by vote of all the members, meeting in 
one place. The national and international unions are made 
up of these local unions, which possess more or less complete 
autonomy and which join in one way or another in the gov- 
ernment of the general body. A very important part is 
played by the local federations or trades councils, which bind 
together the local unions of particular cities. 

The objects of trades unions in the United States are 
essentially the same as in England. They pay benefits, as a 
rule, in case of the death, sickness, or permanent disability 
of a member. A few unions, in whose trades it is customary 
for the workmen to furnish their own tools, insure the tools 
of the members against fire and accident. The out-of-work 
benefit, however, has not attained as much importance in 
America as in Great Britain. 



534 PRINCIPLES OF POLITICAL ECONOMY 

The primary object of trades-union policy in the United 
States may perhaps be said to be the establishment of a stand- 
ard rate of wages; that is to say, a fair uniform compensa- 
tion to all members for the same performance, and not neces- 
sarily a uniform wage for each member by the day or by the 
week. Like trades unionists abroad, American unionists 
emphasize the importance of a shorter work-day and discour- 
age overtime work and work on Sundays and holidays. 

Every labor organization aims to be able to set a definite 
choice before the non-union men of its trade: they may join 
the union or they may leave the occupation. " The union is 
conceived as a means of bettering the condition of its mem- 
bers by united action. If this action is to be thoroughly 
effective, it must be taken by or on behalf of all the members 
of the craft. It is by the establishment of an absolute 
monopoly of labor power of a particular kind that the union 
hopes to raise the market price of that sort of labor power 
and to ameliorate the conditions under which it is sold and 
used. The trades unionist conceives the members of his craft 
as a corporate body whose interests it is the duty of every 
member to further. More than that, he conceives the whole 
wage-earning class as a larger unity, to the welfare of which 
every member of it is in duty bound to contribute. The work- 
ingman who refuses to contribute to the support of the union 
of his craft, who stands aloof and gives aid and comfort to 
the enemy, is regarded as a traitor to his own trade and to 
the working class as a whole. His mind is to be enlightened, 
if it can be, by argument and persuasion ; but if he refuses 
to be persuaded, any legal means of bringing him to conform 
his action to right rules are legitimate and praiseworthy.'' 1 

In France, the trades unions Qsyndicats ouvriers) have 
600,000 members ; in some industries, — type-setting, engi- 
neering, and mining, — they have formed strong, well- 

1 Report of the Industrial Commission, Vol. XVII, p. 1. A defence and 
account of the American Federation of Labor may be found in H. N. Casson, 
" Organized Self-Help " (1901). 






STRIKES 535 

organized federations. In Germany, the Grewerkschaften (as 
the trades unions are called) are as a rule more socialistic 
than in France or England. 

Especially when grouped into large organizations, trades 
unions have undoubtedly increased the power of the working 
classes. They have contributed to the education of laborers 
and promoted culture and social intercourse among their 
members. They have helped to secure the enactment of 
laws providing for safer, more hygienic conditions of 
employment, shorter hours of labor, and the regular cash 
payment of wages. They have secured better conditions 
in the labor contract, in several ways: by helping laborers to 
move to less crowded labor markets when the supply in any 
locality becomes excessive ; x by limiting the number of 
apprentices admitted into each trade ; by collective bargain- 
ing with employers ; and by threatening or actually resorting 
to strikes and boycotts. 

§ 1. Strikes 

A strike is a concerted refusal to work. Strikes are often 
regarded as the sole purpose and the essential function of 
trades unions. But, as we have already indicated, this is 
a mistake. A well-organized union may gain advantages 
without striking, just as a general may be victorious without 
fighting battles. In fact, the best organized and most 
powerful unions are those that declare the fewest strikes. 
Nevertheless, the strike is the last resort of the trades union. 

In most civilized countries the right to strike is not contro- 
verted. 2 For if we grant that labor is a commodity like any 

1 Quite a long while ago, M. de Molinari suggested the creation of labor 
exchanges, resembling stock exchanges, where employers and employees could 
find each other, — where, in other words, the employer could apply for labor 
and the laborer for employment, thus giving labor a mobility almost equal to 
that of capital. 

2 There are weighty reasons, however, for denying that laborers employed 
by the government, or those engaged in occupations of eminent public 
importance (such as providing illumination, or water, or railroad transporta- 



536 PRINCIPLES OF POLITICAL ECONOMY 

other article, every person has a right to refuse to sell his 
commodity if the purchaser will not pay the price that is 
asked for it. But the effectiveness and wisdom of strikes is 
still a matter of discussion. 

Strikes, being appeals to force, possess all the disadvantages 
of war. They entail an enormous waste of productive 
energy. 1 They cause great suffering, and leave, in the heart 
of the vanquished party, (whether workers or employers) a 
feeling of resentment which prepares the way for future 
conflicts. But it cannot be denied that this method, radical 
as it is, has helped to raise wages, and especially to reduce 
the hours of labor. We have already pointed out what 
changes have taken place in these two respects. The efficacy 
of strikes must not be judged from the number that are 
recorded statistically as successful. A single successful 
strike may result in an increase of wages in a great many 
industries. It is, moreover, not so much strikes themselves 
which raise wages, as the constant fear of strikes. 

Those who deny the efficacy of strikes as a means of in- 
creasing wages point out that wages have increased' quite as 
rapidly, or even more rapidly, in those trades and occupations 
in which strikes never occur and in which there are scarcely 
any labor organizations; for instance, among farm laborers 
and domestic servants. But why, let us ask, is this true ? 
Because these classes of laborers have profited indirectly by 
the increase of wages in the organized industries. Wages 

tion) have the right to strike. One may, moreover, very properly raise the 
question whether every person who carries on a trade or who performs 
work of any kind for others does not also perform a "social function" or 
"public function" in the true sense of the term, and whether, therefore, 
to strike is not a violation of the principle of social solidarity ? The right 
to strike presupposes, in fact, a state of conflict among men, and would 
manifestly be inadmissible under an ethically superior social system. 

1 The 22,793 strikes which have taken place in the United States in the 
years 1881 to 1900 cost the employees a loss in wages of nearly $260,000,000 
and an expenditure of over $16,000,000 by labor organizations. The losses of 
employers amounted to nearly $123,000,000. (Sixteenth Annual Report of 
the Commissioner of Labor, 1901, p. 24.) 



ARBITRATION AND CONCILIATION 537 

have increased on the farms simply because laborers have 
migrated from the country to the cities, in quest of better 
pay. Again, the wages of domestic servants naturally tend 
to increase whenever the wages of industrial employees in- 
crease. In the last analysis it may be said that trades unions 
are becoming the regulators of the labor market, whereas 
heretofore the great army of unemployed laborers weighed 
on the market and depressed the price of labor. From both 
the economic and the ethical point of view, a great step for- 
ward has thus been taken. 

§ 2. Arbitration and Conciliation 

Political conflicts between nations, which formerly gave 
rise to incessant warfare, are now more frequently settled 
by arbitration. Similarly, conflicts between labor and capi- 
tal tend to be adjusted by peaceful agreements rather than 
by strikes, which are essentially appeals to force. 

The most characteristic method for the peaceful settlement 
of labor disputes is also called arbitration. But industrial 
arbitration, in order to accomplish the best results, presup- 
poses the existence of strong labor organizations sufficiently 
enlightened, and above all sufficiently disciplined, to accept 
the judgment of arbitrators even when it is not in favor of 
the laborers. This is not usually the case. In some of the 
great industries of England, however, boards of conciliation 
and arbitration, elected by employers and employees, perform 
their work successfully. 

In the United States the principle of conciliation and 
arbitration has steadily gained ground. In half the states 
of the Union there are now state boards of arbitration for 
the adjustment of grievances and disputes between employers 
and employees by conciliation or arbitration. In several of 
the states these boards possess some of the attributes of ordi- 
nary law courts, being empowered to compel the attendance of 
witnesses and the submission of relevant testimony. 1 

1 See Vol. V, Report of the U. S. Industrial Commission, p. 148. 



538 PRINCIPLES OF POLITICAL ECONOMY 

The formation of a committee representing both labor and 
capital, for the purpose of considering fairly and dispassion- 
ately the questions at issue, is an eminently rational and civil- 
ized method of settling industrial disputes. Many labor 
controversies are due to misunderstanding and distrust. In 
such cases all that is necessary is a friendly meeting of the 
representatives of employers and employees. This method, 
known as conciliation, has secured the amicable settlement 
of many questions that might have led to strikes and 
lockouts. 

When, in the absence of efforts at conciliation, or because 
of the failure of conciliatory boards to adjust the matters of 
dispute, labor disagreements have led to an open rupture, 
arbitration, i.e. an appeal to the decision of an impartial third 
party, has often proved successful. Sometimes the two 
parties to a dispute voluntarily agree, in advance, to abide 
by the decisions of the board of arbitrators. One of the 
most striking recent examples of voluntary arbitration was 
the settlement of the coal strike of 1902 by a board of 
arbitrators chosen by President Roosevelt. Arbitration, 
however, is not always voluntary. Sometimes the partici- 
pants in industrial conflicts involving a certain number of 
persons are compelled by law to submit their grievances to a 
board of arbitrators having the power to enforce obedience 
to its decisions. The most celebrated example of this 
so-called compulsory arbitration is furnished by New Zealand. 
In that country the board of arbitration is not, strictly 
speaking, merely a board, but really a court of law. Unlike 
ordinary civil tribunals, it may, moreover, of its own initia- 
tive, try and settle all labor conflicts. This system, which 
has been in effect since 1894, appears to work well; it has 
preserved industrial peace. But we must remember that 
New Zealand is a small country, in which trades unions have 
long been powerfully Organized, and in which they include 
the whole laboring population, Wherever labor organiza- 
tions are still in an embryonic state there is practically no 



workingmen's insurance 539 

way to make arbitration compulsory, or, above all, to make it 
acceptable to all parties concerned. 

Another device for securing industrial peace is the estab- 
lishment of sliding scales. As the result of an agreement 
between employers and employees, valid for a stated period, 
the rate of wages is determined arithmetically according to 
the selling-price of the product ; when prices rise, wages rise, 
and vice versa. But this ingenious device is applicable only 
in the case of simple products, such as coal and cast-iron ; and 
even in these cases it involves troublesome complications. 1 

VII. Workingmen's Insurance 

For a workman to get fair wages is certainly desirable; 
but it is not enough, inasmuch as there ought to be some 
guarantee that his income will not be insufficient at critical 
times. Every laborer is constantly exposed to five possible 
misfortunes which are at any time liable to render him either 
temporarily or permanently unable to work, and hence un- 
able to earn the means of subsistence for himself and his 
family. Three of them he shares with the rest of mankind : 
illness, old age, and death. Two of them are peculiar to his 
economic position : accidents and loss of employment. 

Can the laborers themselves, by means of saving and organ- 
ized effort, insure themselves sufficiently against these 
threatened dangers, or should they look to the state for help ? 
It is unlikely that saving, especially among the poorer classes, 
will be a sufficient insurance against so many possible mis- 
fortunes. 

In fact, the laboring classes themselves have succeeded in 
providing against only one of these risks, — illness — and 
their success in this effort has been incomplete. There are 

1 Sometimes agreements are made between employers' organizations, on 
the one hand, and trades unions on the other, fixing wages at a mutually 
acceptable rate for a certain period. These agreements differ from the 
sliding scale, for here the laborer does not play a merely passive part. 



540 PRINCIPLES OF POLITICAL ECONOMY 

in most countries a large number of so-called mutual benefit 
societies, whose object is to pay a regular allowance to mem- 
bers whom illness has rendered for a time incapable of work- 
ing. These societies are supported by small dues and usually 
meet the doctors' and druggists' bills of sick members. 

As regards the four other risks, little or nothing has been 
done by the laborers themselves. The annual premium that 
must be paid to provide an annuity for workers who have 
passed the age of sixty or seventy years is still, in spite of 
numerous ingenious financial schemes, much too high for the 
modest means of the average laborer. Many benefit soci- 
eties, to be sure, promise to pay a pension to all their mem- 
bers who reach a certain advanced age; but this pension is 
usually very small, and in many cases it is doubtful whether 
these associations are in a position ever to fulfil their promises. 

As regards death and accidents, there are of course innu- 
merable insurance companies founded especially to provide 
against these contingencies ; but their rates are high, and 
they make no effort to reach the poorer laboring classes. 
Outside of the United States, comparatively few members of 
the middle classes insure themselves against death or acci- 
dents, and we can scarcely expect the laboring classes to 
manifest greater foresight than their wealthier neighbors. 

As regards insurance against loss of employment, the Eng- 
lish trades unions have accomplished excellent results, 
because of their strong organization and because of the high 
dues which their members are obliged to pay. But even in 
England, the laborers themselves can cope with this diffi- 
culty only when the loss of work is confined to certain locali- 
ties or to certain groups of laborers. Probably the strongest 
and richest trades union in the world would be ruined in a 
few weeks if all its members should find it impossible to 
secure employment and should depend on the funds of the 
union for support. 

If, therefore, the laborers themselves are incapable of mak- 
ing sufficient provision for meeting the dangers to which 



GERMAN LABOR INSURANCE 541 

they are exposed, must they not turn to others for help ? If 
so, to whom shall they turn ? 

What, in this respect, are the duties of the employer? 
Especially as regards the danger of accidents and of reach- 
ing too advanced an age for continued labor, may it not be 
urged that the employer is quite as responsible for his labor- 
ers as for the machines or implements that are worn out in 
his service ? When a machine breaks and becomes temporarily 
or permanently unfit for further use, the loss falls entirely 
on the employer. Similarly, some employers, especially large 
stock companies, have voluntarily founded insurance funds 
to provide for the financial relief of disabled members or of 
those who have reached an advanced age while in their em- 
ploy. Sometimes these funds are furnished entirely by the 
employer, sometimes they are provided by both employers 
and employees, the latter being required to contribute a cer- 
tain part of their wages. Many American railroad companies, 
for instance, have founded so-called "relief departments" for 
the purpose of paying regular allowances to sick or disabled 
employees, or to such employees as have reached the age of 
60 or 65 years while in the company's service. Arrangements 
of this sort, however, are the exception rather than the rule. 

What, we may next ask, are the duties of the government 
in this respect ? The principle of social solidarity, which we 
have already explained, requires that society as a whole, 
which reaps the advantages of productive activity, should 
also bear a part of the burden which falls upon the laboring 
classes, and should participate in the risks which productive 
activity involves. 

This is what Germany has done. By the enactment of 
three celebrated laws, — that of 1883 concerning illness, that 
of 1886 concerning accidents, and that of 1889 concerning 
old age and incapacity for work, — the expense of providing 
against these three contingencies must be borne partly by 
the employers, partly by the employees, and partly by the 
government. 



542 PRINCIPLES OF POLITICAL ECONOMY 

To insure laborers against illness, the employers in Ger- 
many are required to pay one-third and the laborers two- 
thirds of the regular premiums. 

For the payment of allowances to laborers who have been 
injured, the German law requires the employers to bear the 
total expense. The theory underlying this requirement is 
that of so-called " industrial risks," according to which acci- 
dents to employers constitute one of the normal, regular 
risks of any trade or industry ; the resulting costs should 
therefore form a part of the general expenses of any business 
enterprise. 1 

To provide for the payment of pensions to superannu- 
ated laborers, half the premium is paid by the employers 
and half by the laborers. But as this variety of insurance 
is exceptionally costly, the government undertakes to bear 
part of the burden by agreeing to pay fifty marks ($12) 
annually for every pensioned laborer. 

This system of workingmen's insurance, which applies to 
eighteen million laborers, is the greatest experiment in state 
socialism that has yet been tried. There are, however, two 
risks against which the German system makes no provision : 
unemployment (i.e. inability to "find work") and death. 

A very important question connected with the insurance 
of laborers is that of responsibility, and particularly of legal 
liability, for each of the kinds of misfortunes which may be- 
fall the laborer. In the United States it is generally as- 
sumed, under the common-law rule, that the employee engages 
in the services of an employer with a full knowledge of all 
the ordinary risks and dangers that are involved, and that 
therefore he cannot charge his master for an injury which he 

1 This theory of industrial risks also possesses the advantage of avoiding 
lengthy discussions and lawsuits in which each party endeavors to shift the 
burden of responsibility. In order to preclude the possibility of debate with 
regard to the amount of indemnity for accidents, the German law provides 
that so much shall be paid for the loss of an arm, so much for a leg, so much 
for an eye, etc. 



THE " FELLOW-SERVANT " DOCTRINE 543 

suffers as a result. Hence the employer is not responsible in 
damages to an employee for an injury incurred through the 
negligence of another employee, technically known as a " fel- 
low-servant." According to this so-called fellow-servant doc- 
trine, a brakeman on a railroad line, for instance, who has 
been injured through the carelessness of a switchman, cannot 
recover damages from his employer ; nor can a factory worker 
who has lost an arm because of the negligence of an engineer 
in the same factory obtain redress from the proprietor or 
owners, under the common-law rule. The manifest injustice 
of this rule led to a movement aiming, by means of statutory 
provisions, either to limit it or to do away with it entirely. 
In the latter event the employer is made liable in all cases of 
accident, whether caused by fellow-servants or not, unless 
primarily caused by contributory negligence of the person 
injured. In some states, the law defines who are fellow- 
servants by setting them off into classes, or simply declares 
that the name shall apply only to those who are in the same 
grade of employment. It should be remarked, however, that 
there is no part of the labor law where statutes are so often 
tinkered, and, consequently, no subject in which a clear, con- 
sistent code, adopted by all the states, is more desirable. 1 

Still another important question is whether laborers' insur- 
ance shall be obligatory or optional: Shall they be obliged to 
participate, or shall the matter be left to their own choice? 
The German system is obligatory ; employers and employees 
are by law compelled to pay the prescribed amounts into treas- 
uries established for this purpose in the various groups of 
industries and in the several regions of the empire. 2 In order 

1 In many states these statutes concerning employers 1 liability apply only 
in the case of railways. Several states have, by statute, made employers 
liable for injury to employees caused by defects and condition of appliances, 
machinery, etc. 

2 These treasuries sometimes accumulate very large sums of money, which 
they are required to invest. Frequently the funds are used to build or man- 
age sanatoriums ; as the sick laborers are sometimes kept in these institu- 
tions, their care involves comparatively little expense. 



544 PRINCIPLES OF POLITICAL ECONOMY 

to prevent any failure on the part of employees to make the 
prescribed payments, the employer is required to pay the 
premiums and to deduct the laborer's share from the latter's 
wages. 

In most countries, workingmen's insurance is entirely op- 
tional, the law attempting nothing more than to fix the 
liability of employers and employees, who may take what- 
ever precautionary measures they choose. 

In France, according to the Civil Code, the employer was 
strictly responsible for accidents to employees only when the 
latter could bring proof that the former was to blame. This 
provision made the employer's liability almost illusory, for 
accident statistics in Germany show that of every 100 acci- 
dents to laborers, the laborer is to blame for 26, the employer 
for 20, both of them for 4, and 50 are due to purely accidental 
circumstances. The French law of 1898, however, which re- 
sembles the German law, makes employers responsible for all 
accidents. With regard to illness and old age, French law 
has left the laborers to take care of themselves, except for a 
few favors granted to mutual societies which pay benefits to 
members in cases of illness and old age. It can scarcely be 
held that old age should be regarded as an " industrial risk "; 
but it may be maintained that the laborer's wages should in- 
clude, in addition to the amount necessary for living, sufficient 
surplus to provide for the years in which he is no longer able 
to work. 

Which of these two systems is preferable ? The plan of 
optional insurance, evidently, is not only in better harmony 
with the principles of liberalism, but less vexatious and less 
burdensome. The obligatory system involves innumerable 
devices for collecting dues, keeping accounts, the issue 
of receipts, etc. Not all people are disposed to look 
favorably upon the vast amount of " red tape " connected 
with the German system. But, on the other hand, it is to 
be feared, — in view of the widespread improvidence 
of mankind, and especially that of the poorer classes, — 



INSURANCE AGAINST UNEMPLOYMENT 545 

that optional insurance will cover only a small part of the 
population. 

Governments may adopt a mixed system, retaining the 
general principle of optional insurance, but encouraging its 
extension by furnishing financial assistance. This has been 
done in Belgium. The government says to the laborer, vir- 
tually : " Help yourself and I will help you." This arrange- 
ment is a good one, but under it there will always be a host 
of incorrigible improvidents ; it should consequently be sup- 
plemented by some legal provision for the relief of laborers 
who have reached an advanced age incapacitating them for 
work. 

We have seen that the German system provides insurance 
against three risks only, but not against death and loss of 
employment. It was originally the intention of the German 
government, however, to provide also for laborers' insurance 
against death, — a calamity which often plunges the working- 
man's family into extreme want. But with regard to insur- 
ance against loss of employment, or the inability to "find 
work," the difficulties are really so great as to be insur- 
mountable. Nothing is harder than to find out whether the 
laborer who claims to be unable to find employment is 
truthful and sincere. Unlike the other misfortunes to which 
the laborer is exposed, the inability to find work cannot be 
established conclusively. Unlike the others, this misfortune 
is not usually confined to individual, isolated cases, but gen- 
erally involves large groups of laborers simultaneously, — all 
the employees of an establishment, or an entire trade, or 
even the whole industry of a nation. 1 

For a long while it was believed that the state could come 
to the assistance of unemployed laborers by recognizing the 

1 The local governments of several Swiss and German towns have founded 
societies for insurance against loss of work, the membership of which is vol- 
untary; and the Swiss town St. Gall has a society of this kind with obligatory 
membership. 

These experiments, however, have not been satisfactory, but other Swiss 
towns are about to try new experiments along this line. 



546 PRINCIPLES OF POLITICAL ECONOMY 

so-called right to work. This "right," which gave rise to 
considerable discussion during the French Revolution of 
1848, is now somewhat discredited. It is now understood 
that the state cannot undertake to provide every laborer 
with the kind of work he can perform, nor guarantee that 
his labor shall be productive, unless the government becomes 
the entrepreneur of all businesses and thus accepts collectiv- 
ism. It is generally agreed at the present time that the 
so-called right to work cannot really be anything more or 
less than a form of public charity. 



VIII. The Future of the Wage System 

In spite of the influences which tend naturally to increase 
wages, and in spite of the ever more active intervention of 
legislative bodies with a view to improving the condition of 
wage-earners, the wage system will always have certain seri- 
ous defects that cannot be overcome, because they are inher- 
ent in the system itself. 

Without doubt, the wage system offers some advantages 
that political economists have been careful to point out. 1 The 
following are the two principal advantages that are attributed 
to it : — 

(cl) To the entrepreneur it secures not only the owner- 
ship of the product, but also the entire control and responsi- 
bility of the business enterprise. (6) To the laborer it 
guarantees a certain, fixed, and immediate income, an income 
that does not depend on the success or failure of the busi- 
ness enterprise in which he is employed. 
* These two advantages are so pronounced that the wage- 

1 It must not be supposed, however, that this method of remuneration was 
devised and adopted because of these advantages. The wage system is simply 
the result of historical necessity, — the outcome of social forces. Yet M. de 
Molinari appears to regard the wage system as a wonderful discovery, like 
that of vaccination or that of the locomotive, when he declares, " The wage 
system was invented because it is impossible for laborers to await the result 
of productive activity, and to incur the risks which it involves." 



DISADVANTAGES OF THE WAGE SYSTEM 547 

workers themselves, as well as the entrepreneurs, generally 
prefer this system to all others, — even to the apparently 
more equitable plan of quasi-partnership, by which laborers 
and employers would share the profits and losses. 

Such a system of partnership presupposes an equality of 
economic position and a community of interests and purposes, 
which do not really exist. Capitalists and proletarians — 
those that possess much and those that possess little or noth- 
ing — are by no means on a footing of equality. The former 
aim to amass wealth ; the latter try to earn a living. The 
former look far ahead ; the latter live from day to day. The 
former act on the principle, " Nothing risk, nothing gain " ; 
the latter have nothing to lose, and therefore nothing to risk. 
Later, when we discuss profit-sharing, we shall see in what 
measure these difficulties can be removed. 

The following disadvantages of the wage system far out- 
weigh, in our opinion, its advantages : — 

(1) This method of remuneration treats labor — that is to 
say the laborer, for it is impossible to separate the one from 
the other — as a commodity, and regards it as subject, in the 
market, to all the laws that determine the value of commodi- 
ties. Now these laws are natural laws, and have nothing 
to do with moral considerations. Hence it has been said — 
Chateaubriand was the first to say it — that the wage sys- 
tem is a survival of the slave system and the slave trade, 
which also treated men as objects to be bought and sold. 

It may be asked whether the same is not true of land- 
owners and capitalists. Is not their income, whether it be 
rent or interest, also determined by the law of supply and 
demand ? To be sure. But landowners and capitalists put 
only their possessions on the market, not themselves. Now 
the man who sells his labor or hires himself for money is 
generally at a great disadvantage when compared with the 
man who exchanges a commodity for money. 1 

1 Ruskin frequently points out that the remuneration of professional men 
— lawyers, physicians, professors, artists, etc. — is not determined by the 



548 PRINCIPLES OF POLITICAL ECONOMY 

(2) By the terms of the wage contract, the laborer gives 
up all claim to the product of his labor, in consideration of a 
fixed sum which the entrepreneur agrees to pay him per 
week or per month. 1 

As a general rule, the great majority of laborers are de- 
prived of all claim to the product of their toil. This is an 
unnatural and unjust state of affairs. It is, moreover, dan- 
gerous in its effects on the intensity and quality of labor, for 
the worker has no incentive to do his best. The only motives 
that can lead him to work well are duty and fear, — not the 
fear of physical punishment, which prompted the slave to 
work, but the fear of being discharged and thus losing the 
means of living. Of these two motives, the first is felt 
with sufficient keenness only by exceptional minds; it is, 
unfortunately, constantly being weakened by the increasing 
antagonism of employers and employees. The second motive, 

law of demand and supply, but by social custom. He proposes that manual 
labor be remunerated in the same manner as intellectual labor. 

1 The nature of the wage contract might be different if we could determine 
a priori the share due to each participant in the productive process. The 
problem to be solved is this : Given two factors, one of which is manual labor 
alone, and the other capital alone, both of which cooperate in a productive 
enterprise. What part of the product ought, theoretically, to belong to each ? 

Robinson Crusoe, for example, provides a canoe and a fishing-net, while 
Friday furnishes his labor. As the result of the day's work, Friday brings 
home ten baskets of fish. How many ought Crusoe (capital) to receive, and 
how many ought to be given to Friday (labor) ? 

This problem is impossible to solve — as impossible as that proposed by 
John Stuart Mill when he asks, ironically, which of the two blades of a scis- 
sors does the more cutting. Yet a great many economists have grappled with 
it. The German economist, Von Thuenen, in a very remarkable book on 
" Natural Wages," attempted to prove, with the aid of mathematics, that the 
wages of labor should be the geometrical mean of two factors, the first of 
which is the minimum cost of supporting the laborer, and the second the 
value of his product. Let the first factor be called a, and the second j?, and 
we obtain the formula : wages = Va p. This so-called formula of natural 
wages, however, indicates what wages the laborer ought to receive, and is not 
supposed to explain how wages are actually determined. Wages are in real- 
ity determined, in Thuenen's opinion, by the productivity of the least pro- 
ductive laborer. (See page 506 ff.) 



PIECE WAGES 549 

of the effects of which the slave system offered an excellent 
illustration, has never succeeded in getting men to do more 
than the least possible amount of work. 1 

To overcome this disadvantage in a certain measure, there 
is now a tendency to adopt the system of piece wages, by 
which the laborer is not paid a fixed sum per hour or day or 
week, but according to the quantity of goods he produces. 
Laborers are generally opposed to this method of remunera- 
tion, which they regard as a device for getting more work 
out of them without ultimately increasing their wages. 2 

Laborers have often advocated the system under which a 
group of employees agree to perform a certain task or "job" 
at a price fixed upon with their employer. The employees 
then do the work and share the proceeds according to rules 
which they have adopted themselves. They constitute a 
sort of small cooperative association in the midst of the 
factory or industrial plant. (Consult the section on co- 
operative societies for production.) 

(3) This system, finally, is sure to create strife between 

1 In manufacturing, the productive inferiority of wage-paid labor is less 
manifest than in other branches, because labor in manufactories can be sub- 
jected to close supervision, its results are directly measurable, and a certain 
amount of work must be done in a given time. 

The inferiority of wage-paid labor is especially noticeable in agriculture, 
and due to the following circumstances : (1) Supervision is much more diffi- 
cult than in a workshop, and increases in difficulty with the size of the farm; 
(2) the results of a farmer's labor generally cannot be found out until a long 
time afterward, and even then not exactly ; (3) the plan of requiring a cer- 
tain amount of work in a given time cannot ordinarily be used, because 
in farming the carefulness and quality of the work is more important than 
its rapidity. 

2 Piece wages have often been introduced by employers as a means of get- 
ting employees to do more work, and then the rate of wages per piece has 
been reduced ; so that the ultimate result is the employer's gain and the 
employee's loss. The actual practice of labor organizations, however, would 
hardly support the widely prevalent belief that the policy of trades unions in 
general is antagonistic to piece-work wages. (See " Report of the Industrial 
Commission," Vol. XVII, page 54.) Sometimes piece wages and time wages 
are combined by guaranteeing a minimum time wage and offering a pre- 
mium for exceeding a certain amount of work per hour or clay. 



550 PRINCIPLES OF POLITICAL ECONOMY 

master and workman, because their interests are antagonistic 
when the product is divided. It is natural, moreover, for 
the laborer to regard it as his interest to furnish the least 
labor possible in exchange for the wages he receives ; while 
the employer, on the other hand, tries to get the most labor 
in exchange for least wages possible. Hence the series of 
conflicts which, in the form of strikes, for several years have 
occupied the public attention. 

Each great school of economists has its own particular 
plan for the reform or abolition of the wage system. 

The liberal school, as we have already said, regards wages 
as the most perfect conceivable system of remuneration, 
because wages are the result of "free contract." This school 
therefore accepts the wage system as a permanently estab- 
lished institution. The only improvement which it advo- 
cates is to make the labor contract still more free. This 
may be accomplished either through the exercise of the right 
of laborers to organize, — a right which liberal economists 
have always admitted, — or by means of such institutions as 
labor exchanges (page 535, note 1), which enable workers to 
find the most remunerative employment, and make traffic in 
labor more nearly like traffic in merchandise. 

The collectivists demand the abolition of the wage system, 
which they regard as the latest form of slavery. In their 
party programmes they insist that the laborer has " a right 
to the full product of his toil." But we believe that, far 
from abolishing the wage system, collectivism would only 
perpetuate it and make it universal. This, in fact, is another 
objection against collectivism, which should be added to 
those already urged. (See pages 472 ff .) We already know 
that collectivists propose to make the nation the only entrepre- 
neur, and to suppress all individual enterprise. Consequently, 
no one would work for himself but each citizen would be 
employed by the nation, and receive a share of the produc- 
tive proceeds equivalent to the amount of labor he had fur- 
nished. If this is not the wage system, one must admit that 



FAIK WAGES 551 

it resembles the wage system very closely indeed. Collectiv- 
ism, as a matter of fact, would not suppress the class of 
wage-workers (for under that social system we should all be 
wage-workers) ; but it would do away with the class of em- 
ployers, because the nation would then be the only employer. 

The Catholic school accepts the wage system as a normal 
and permanent condition. This is logical, because the con- 
tinuance of the two classes of employers and employees is a 
fundamental part of the programme of Catholic reformers. 
But they protest against the treatment of labor as a com- 
modity, and do not desire to have wages determined by the 
law of supply and demand. They maintain that the laborer 
has a right to fair wages, that is to say, sufficient wages to 
enable him and his family to live under conditions that are 
decent and worthy of a creature of God, entitled above all to 
his daily bread, but who " does not live by bread alone." 1 

But who shall determine what is the proper and sufficient 
standard of living in a given community ? The employer ? 
Even if the employer is an exceptionally enlightened and 
unselfish man, there will thus be no effectual guarantee that 

1 This is the same as the popular idea that the workman should receive 
a "living wage, 1 ' i.e. wages sufficient to enable him to meet fairly and 
fully the physical, mental, and moral requirements and conditions of life, 
individual and social. This idea, however, is singularly vague, for whereas 
the London County Council estimated the "living wage" at 24 shillings a 
week ($6), the socialist, Keir Hardie, fixes it at £3 a week ($15). 

Concerning the saying that " a man should have a fair day's wages for a fair 
day's work," Professor Jevons remarks: " Nothing, at first sight, can seem 
more reasonable and just ; but when you examine its meaning, you soon find 
that there is no real meaning at all. It amounts merely to sayjng, that a man 
ought to have what he ought to have. There is no way of deciding what is 
a fair day's wages. ... If the saying means that all should receive the same 
fair wages, then all the different characters and powers of men would first have 
to be made the same, and exactly equalized. . . . Wages vary according to 
the laws of supply and demand, and as long as workmen differ in skill, and 
strength, and the kind of goods they can produce, there must be differences 
of demand for their products. Accordingly there is no more a fair rate of 
wages than there is a fair price of cotton or iron." (" Primer of Political 
Economy," page 60.) 



552 PRINCIPLES OF POLITICAL ECONOMY 

wages are fair and sufficient. Hence Catholic reformers 
usually accept the idea that the " fair wage " must be fixed 
by law. But from the purely theoretical point of view 
which concerns us here, a standard of wages established by 
law must be regarded as unjust, because it necessarily 
implies that at a fixed figure wages shall be regarded as fair. 1 
Why, moreover, should there not also be a "fair" income for 
the landowner and the capitalist ; that is to say, an income 
fixed at a certain level ? There is no reason whatever for 
fixing the share of the laborer, and at the same time regard- 
ing the share of the other participants as unlimited. Must 
the laborer be satisfied with only a modest competence ? 
He has more right, or at least as much right as the others, 
to participate in all the fruits of a progressive civilization, 
even though they be matters of luxury. 

The cooperative school, lastly, regards the wage system as 
a relatively inferior method of remuneration, destined to be 
gradually supplanted by association or co-partnership. Co- 
operators expect that some day the laborers will be united in 
cooperative societies owning the instruments of production ; 
that the laborers will receive the entire product of their work ; 
and that thus they will cease to be employees and will become 
their own masters. Meanwhile, as long as the wage system 
and its necessary complement, the entrepreneur system, con- 
tinue to be necessary, this school endeavors to graft upon the 
wage system the arrangement known as profit-sharing. Under 
this arrangement, proposed as a partial corrective of the 
defects of the wage system, the laborer receives, in addition 
to his wages^ (which continue to be determined by the law of 
demand and supply), a share in the profits of the business. 
We shall examine this arrangement more closely under the 
head of Profits. 

1 Some European municipalities have begun to establish, a minimum wage 
for laborers employed by contractors engaged in work for the municipality. 
But it is difficult to conceive the possibility of a legal minimum wage for 
purely private enterprises, because employers are always at liberty not to 
employ laborers. 



CHAPTER II — INTEREST 
I. The Ownership of Capital 

The existence of a particular kind of income that goes to 
the capitalist evidently presupposes that capital belongs to 
some one, and consequently gives rise first of all to the ques- 
tion whether private property in capital should be regarded 
as legitimate. The classical economists have answered this 
question decidedly in the affirmative. In the case of land, 
on the contrary, we shall see that important reserves are 
made, and its private ownership is usually defended only on 
grounds of public utility. But the embarrassing circum- 
stance that land is not a product of labor is not present in 
the case of capital. There is no doubt that all capital, no 
matter what definition of it we may give, and no matter what 
form it may take, is a product of labor, and, as such, may 
properly become an object of private property. 

The classical economists maintain that the right of private 
property in capital is even less subject to attack than the 
ownership of other products, because it is based on a twofold 
claim ; it is not only due to the labor of production, but also 
to that of saving, which in the creation of capital is quite as 
indispensable as production. The right of the farmer to 
the wheat that he has harvested is sacred ; his right to the 
same wheat when it has been withdrawn from purposes of 
consumption and kept in reserve for sowing, — that is to 
say, when it is transformed into capital, — - ought to be 
doubly sacred. 

This second argument seems to us of doubtful validity. 
See what we have said concerning saving or abstinence, 

553 



554 PRINCIPLES OF POLITICAL ECONOMY 

page 129.) It is at all events superfluous; the first alone 
is sufficient. 

The legitimacy of property in capital has nevertheless been 
vigorously attacked by socialists. The principal purpose of 
Karl Marx's 1 celebrated book on " Capital " is to prove 
that private property in capital is both the result of past 
spoliation and a means of continuing this spoliation "upon 
a larger and larger scale. Collectivists consider private 
property in capital as legitimate only when it exists in the 
modest and primitive forms usually referred to by political 
economists, e.g. Robinson Crusoe's canoe, the plane made by 
Bastiat's carpenter, the coins put away in an old stocking or 
deposited in the savings-bank by a peasant. But, they main- 
tain, this is not true capital; this is not the capital that pro- 
cures wealth and power without exertion. True capital is 
never the product of the owner's labor, or saved from the pro- 
ceeds of the owner's labor. Tt is, on the contrary, saved from 
the product of the labor of others, these others being hired wage- 
workers. This saving, moreover, can be increased only by 
using it to employ the labor of still more wage- workers in 
order to produce additional profits. All great fortunes have 
been created by this process of cumulative spoliation. 2 

The only conclusion to be drawn from this argument is 
that there are two kinds, two classes, of capital: "small" 
capital, — the private ownership of which is legitimate 
because it is the result of the owner's labor ; and " large " 
capital, — private property in which it is illegitimate because 

1 Rodbertus preceded Marx in many points, as his most important works 
were written half a century ago. Almost totally ignored for a long time, 
Rodbertus has recently acquired considerable celebrity as a forerunner of the 
great collectivist doctrines. An excellent account of his work may be found 
in W. H. Dawson, "Socialism and Ferdinand Lassalle," and Charles Andler, 
"Les Origines du Socialisme d'Etat en Allemagne." 

2 It is also often said that true productive capital consists of workshops and 
factories, machinery, utilizable natural forces, mines, and raw materials. All 
these things are the result of the labor of many persons, of inventions, trials, 
and experiments, carried on during many centuries by millions of men. No 
one would pretend to be the owner of the steam-engine, not even James Watt, 



THE OWNERSHIP OF CAPITAL 555 

it involves the appropriation of the product of others' labor. 
Now, as all " large " capital evidently must have been " small " 
at one time, it would follow that the private ownership of 
capital is legitimate at the outset, continues to be so up to a 
certain point in its growth difficult to determine, and then 
becomes an abuse. 

We object to the assertion that capital, by its very nature, 
can be increased only by plundering the workingman. We 
believe that this is a perversion of its nature (although it 
doubtless does take place frequently), and that we can and 
should try to prevent it. At all events, we are not called 
upon to justify the private ownership of vampiric capital, 
but of that capital which, as we have defined it, is the result 
of individual labor or saving. Even in the light of what is 
said above, this ownership is justifiable. It is, moreover, 
dictated by social utility. As the development of production 
absolutely requires a supply of accumulated wealth (see page 
120), one must admit that those who accumulate wealth and 
thus create capital perform a function of very great social 
importance ; and certainly the most effectual method of 
encouraging this accumulation of wealth for productive pur- 
poses is to attribute the property of that wealth to those 
who, by not consuming it, have created capital. 

The problem of private property in capital once settled, 
there are still two others to be solved : — 

Has the owner of capital the right to use it to set others 
to work, making a profit thereby ? This question we shall 
study in the following section (pages 558 ff.) and in the 
chapter on Profits. 

who invented it. Why, then, are steam-engines owned by individuals who 
grow rich by their use ? 

This is a popular argument entirely devoid of sense. No capitalist pre- 
tends to own a force of nature (aside from certain reserves to be discussed 
under the head of land-rent), or the steam-engine in genere ; for these would 
be of inestimable value. He simply claims to be the owner of the value of 
the machines in his possession, this value representing what it cost him to 
have them built. 



556 PRINCIPLES OF POLITICAL ECONOMY 

Has the owner of capital the right to lend it to others on 
condition that they pay him interest for its use ? This ques- 
tion we shall answer first. 



II. The Legitimacy of Interest 

Of all kinds of income the legitimacy of which has been 
called into question, none has been more violently contested 
than that which is due to the loan of capital and is called 
interest. For over two thousand years this problem has 
given rise to vehement and unceasing polemic. 

The following are the principal points that have been 
raised during this controversy : — 

(1) It was asserted, by Aristotle among others, that 
money is unproductive : one coin has never given birth to 
another coin. 

To this, economists reply that money only represents capi- 
tal, which is productive both by its nature and according to 
its definition. With money, as Bentham observed, one can 
buy sheep, and sheep give birth to sheep. 

(2) It was asserted that in loaning money the lender 
undergoes no genuine privation and consequently has no 
right to an indemnity in the shape of interest. 

In answer to this, economists endeavor to prove that the 
capitalist must deprive himself in order to create capital; 
some have even declared, with Senior, that abstinence is 
the sole source of capital. 

(3) It was asserted that the perpetuity of interest is un- 
natural and unjust. At the rate of five per cent (and with- 
out reckoning compound interest) the lender will recover his 
entire loan in twenty years, in the guise of annual interest- 
payments. In forty years, he will collect the original sum 
twice over, and in a century, five times ; nevertheless, he still 
retains his right to the entire reimbursement of the loan ! 

To this it is answered that the regular payment of inter- 
est is by no means the same thing as the gradual restitu- 



THE LEGITIMACY OF INTEREST 557 

tion of the loan, any more than the annual rent of a farm is 
part of the purchase-price of the land. Payment for the use 
of a thing, and the return of the thing itself or an equivalent 
for it, are two distinct and different operations. Interest, 
like the rent of a farm, is the payment for the use of wealth 
that is perpetual, or, at least, wealth that can be made per- 
petual by constant renewal. And if the use that one can 
mal^e of a thing is perpetual, why should not the price paid 
for its use be also perpetual ? 1 

(4) It was asserted that the borrower is obliged to pay 
bach more than he has received. 

This the economist denies. For if I give you a dinner 
to-day, in exchange for a dinner just like it which you will 
give me a hundred years hence, I am giving you much 
more than I receive, and you are getting decidedly the 
better of the bargain. Why ? Because a dinner a hundred 
years hence is not worth as much as a dinner now. For the 
same reason, if I give you $100 to-day in exchange for $100 
which you will give me a century later, the transaction is 
unfair. Even if you paid back the money a year later, your 
payment would not be equitable. For me, as for everybody 
else, the future is not as good as the present ; and precisely 
in order to equalize matters, it is agreed that I shall now 
give you $100 in exchange for $105 which you will give me 
a year later. This difference of $5 indicates the difference 
of value between the present and the future, and measures 
the superiority of present goods over future goods. 2 

In antiquity and the Middle Ages the discussion with 
regard to interest was largely ethical or religious, and the 
participants in the controversy had in mind the payment 

1 But if the borrower has used up the wealth loaned him, — and he may 
have borrowed it only to consume it, — will it then be renewed ? Certainly 
not. Loans for consumption lead to the destruction of wealth and are 
liable to ruin the debtor, — a fact that we have already indicated (page 358). 

2 This argument, presented long ago by Turgot, constitutes the basis of 
Boehm-Bawerk's entire theory of interest. (Consult this author's remark- 
able book on " Capital and Interest," and page 561.) 



558 PRINCIPLES OF POLITICAL ECONOMY 

of interest for borrowed capital. The problem they sought 
to solve, as we shall explain in the next section, was this: 
Ought the borrower to pay interest for a loan, and ought 
the lender to exact its payment ? With the classical econo- 
mists and their successors, however, the problem became 
primarily economic, not ethical or religious, and is better 
stated in these terms : How can we account for the gain 
which a capitalist receives for employing capital in a business 
enterprise? The answers to this question are by no means 
unanimous, and although we cannot here undertake a com- 
plete discussion of each of them, we shall give a brief state- 
ment of the several groups of answers, 1 following the 
classification made by Boehm-Bawerk : — 

1. The productivity theories. This name is applied to the 
theories based on the familiar fact that a workman provided 
with capital (tools, machines, etc.) can produce more 
products or better products than without capital. This 
additional product " produced by capital " constitutes in- 
terest. J. B. Say seems to have been the first author to 
speak of the " productive power " and the " productive ser- 
vices " of capital. The earlier advocates of the productivity 
theory do not inquire whether or why goods produced with 
the aid of capital are worth more than the cost of their pro- 
duction, including the cost of the capital itself or of the wear 
and tear of capital during the productive process. Subse- 
quent partisans of this theory, while retaining the idea of 
the actual physical productivity of capital, recognize the 
necessity for some explanation of the gain in value, i.e. the 
economic productivity of capital. 

2. The use theory asserts, in brief, that in capitalistic 
production there is a sacrifice not only of the material sub- 

1 For a further discussion of this subject we refer the reader to the books 
upon which our own resume' is based: Boehm-Bawerk, " Capital and Inter- 
est," Vol. I; Macfarlane, "Value and Distribution" ; the article on "Zins" 
in Conrad's " Handwoerterbuch der Staatswissenschaften " ; Kleinwachter, 
" Das Einkommen und seine Vertheilung. " 



THE USE THEORY OF INTEREST 559 

stance of capital, but also a sacrifice of the use of the capital 
during the period of production. The best and fullest state- 
ment of this theory is found in the work of the brilliant 
Austrian economist, Carl Menger, from which we quote as 
follows : — 

" Production always demands a certain period of time, 
sometimes long, sometimes short. For the purpose of pro- 
duction it is necessary that a person should have productive 
goods at his disposal not only at any single stage inside that 
period, but that he should retain them at his disposal during 
the whole period, and unite them in the process of produc- 
tion. The disposal over quantities of capital-goods during 
certain periods of time therefore constitutes one of the con- 
ditions of production. 

" This use of capital, or power to dispose of it, so far as it 
is in demand and not to be had in sufficient quantity, may 
thus obtain a value and become an economic commodity. 
When this happens, as is usually the case, then, over and 
above the other means of production employed in any actual 
productive process, there enters into the sum of value con- 
tained in the anticipated product the disposal (or power to 
dispose) of the goods requisite for production." 

This theory clearly rests on the contention that there is 
a use of capital distinct and separate from that involved in 
the using of the capital itself. 

3. The abstinence theory, first clearly stated by N. W. 
Senior, is based on the thought that if men postpone the 
present enjoyment of their wealth, and devote the resources 
so spared to the purposes of production, it is manifest that 
the resulting increase in product is very intimately con- 
nected with the saving which made possible the adoption of 
the more productive methods. In other words, the cost of 
production must include not only the labor and capital that 
is used in the process of production, but also the disutility 
involved in the postponement of present enjoyment, or, in 
brief, abstinence. 



560 PRINCIPLES OP POLITICAL ECONOMY 

4. The labor theories. Under this name Boehm-Bawerk 
includes a number of theories which agree in considering 
interest as the remuneration for " labor " performed by the 
capitalist. Concerning the nature of this "labor" there is a 
divergence of views. 

(a) The English group of authors, especially James Mill, 
regards interest as wages for the labor of producing capital. 

(5) The French group, chief among which is Courcelle- 
Seneuil, defines interest as the " wages of saving," and em- 
phasizes the will-power and firmness of purpose required to 
save wealth. 

(<?) The German group, to which many so-called " social- 
ists of the chair" belong, regards the ownership of land and 
of capital as a social office or " function," and defines the 
return from land and capital as a kind of salary due to the 
leaders of agricultural or industrial enterprises. This con- 
ception manifestly makes little or no distinction between 
profits and interest. 

5. The exploitation theory. This celebrated theory, 
founded by Rodbertus and Karl Marx, regards rent, interest, 
and profits as all due to the exploitation of workingmen. 
Accepting the defective terminology of the orthodox econo- 
mists, these authors frequently employ profits and interest 
as interchangeable terms, and direct their attack against the 
whole complex return secured by the capitalist. The social- 
istic attack is much more effectual with regard to profit than 
with regard to interest ; we shall therefore discuss the ex- 
ploitation theory when we take up the legitimacy of profits. 

As applied to interest, the exploitation theory may be 
fairly stated in the following propositions : — 

The value of any commodity is measured by the quantity 
of labor required to produce it. 

Capital is not an original and independent factor of pro- 
duction, but may be resolved into the labor that produced it. 

The whole product belongs in equity to the laborer. The 
capitalist, however, takes advantage of the laborer's necessi- 



THE TIME THEORY OF INTEREST 561 

ties and compels him to make a wage-contract that despoils 
the wage-earner of a large part of the product of his labor; 
this is done, of course, under the sanction of law and custom. 

6. The sixth group of authors treats the problem of interest 
as primarily a problem of value and regards the influence of 
time, in the estimation of values, as the fundamental cause of 
all economic phenomena connected with interest. " Present 
goods," says Boehm-Bawerk, the principal advocate of this 
theory, " are as a rule worth more than future goods of like 
kind and number." The productivity of capital is not the 
only cause of this higher valuation of present goods ; there 
are two other causes. One is the fact that many men are 
less efficiently provided for in the present than they hope to 
be in the future. There is, moreover, a tendency of mankind 
to underrate or discount anything in the future. 

Roundabout methods of production are generally more 
profitable than direct methods. But long, circuitous pro- 
cesses of production require the necessary money or present 
goods to meet the demands that arise during production. 
Hence present goods, which enable us to obtain the advan- 
tage of roundabout methods, are worth more than future 
goods, which are not yet applicable productively. In other 
words, the capitalist may obtain, with a proportionately 
smaller quantity of present (and therefore more valuable) 
goods, a proportionately larger quantity of future (and there- 
fore less valuable) goods, which, as time goes on, gradually 
grow in value until they reach, so to speak, the status and 
value of present goods. Whoever exchanges present for 
future goods demands some premium, some surplus in value ; 
this premium or surplus is interest. 

Some of these theories are endeavors to explain interest as 
an economic category. Others are attempts to justify the 
capitalist's income. We may safely accept the principle that 
so long as there is capital there will be interest, and as the 
socialists by no means contemplate the destruction of capital, 
interest will exist in a socialistic community. Bat who shall 



562 PRINCIPLES OP POLITICAL ECONOMY 

collect this interest? That is an entirely different question. 
Does not the owner of capital in modern society possess a 
despotic power, and does not interest therefore partake of 
the nature of an unfair income? 

Nowadays, the discussion regarding the legitimacy of in- 
terest has been shifted to another domain ; and the present 
form of the question is : Shall we admit the legitimacy of 
private property in capital? If we do, the legitimacy of 
interest follows as a logical consequence. Likewise, once we 
have admitted that houses may become objects of private 
property, the legitimacy of rent requires no proof. What 
is the need of inquiring whether the house can be employed 
productively, or whether the owner, by not occupying it, 
undergoes privation ? 

Even in case borrowed wealth has not been employed pro- 
ductively, and could not, by reason of circumstances, have 
been so employed ; or, in other words, in case it is not capital, 
but simply objects of consumption, why should the owner of 
wealth be obliged to lend it without compensation? The 
admonition mutuum date nil inde sperantes is evidently not 
economic, but evangelical, like the teaching that he who has 
two garments should give away one of them. From the 
economic and legal point of view, a sufficient justification 
of interest consists in the simple principle that no man shall 
be deprived of his belongings, and that whoever consents to 
relinquish possession of them to the advantage of others has 
a right to do this on whatsoever conditions it may please him 
to prescribe. 

What matters it whether or not the lender thus experi- 
ences privation and makes a sacrifice ? Since when is a per- 
son's remuneration, be it profit or wages, proportionate to the 
sacrifice he has made or the privation he has experienced? 
By virtue of what principle shall I be obliged to put gratui- 
tously at the disposal of my fellow-men all the property that 
I cannot or do not wish to make use of for myself ? Must I 
allow other people to occupy my apartments because I am 



THE HISTORY OF INTEREST 563 

compelled to be away, or let them eat my dinner because I 
am not hungry ? Such a doctrine would need to be based on 
the principle that in this world a man has a right only to the 
amount of wealth strictly necessary for his own consumption, 
and that the surplus belongs by right to all mankind. To 
accept this principle is to adopt communism pure and simple. 

For these reasons, the question is to-day scarcely a matter 
for discussion. Catholic social reformers, while retaining the 
old dislike for interest, — usura vorax, — confine themselves 
to seeking a means for diminishing the power of money ; and 
this is a perfectly legitimate endeavor. Socialists themselves, 
at least those belonging to the collectivist school, frankly 
admit that interest is an inevitable consequence of the right 
of private property. They simply shift the controversy to 
another quarter, and, instead of attacking the legitimacy of 
interest, they attack the legitimacy of private property in 
capital, as we have pointed out in the preceding section. It 
is plain that whenever the individual ownership of capital is 
abolished, the payment of interest will also cease. 

As the legitimacy of interest seems so evident to-day, why 
has it so long been denied ? Because of historical circum- 
stances which we shall now consider. 

III. History of Loans at Interest 

Throughout antiquity, loans were made at interest, and 
often on hard conditions. But such great men as Moses, 
Aristotle, and the severe Cato himself, have roundly stigma- 
tized it. After the advent of the Christian religion, even 
more vigorous attacks were made upon it by the Church 
Fathers ; and when the power of the Church had been firmly 
established, loans at interest were expressly forbidden by 
civil as well as by canon law. 1 

1 The formal prohibition of loans at interest between Christians dates from 
the Council of Vienna, held in 1311. It was still permitted on the part of Jews, 
because it was felt that money-lenders could not be dispensed with, and that 
the Jews rendered Christians a great service by bearing the burden of this sin. 



564 PRINCIPLES OF POLITICAL ECONOMY 

Although this attitude subsequently came to be regarded 
with profound contempt and considered as betraying total 
ignorance of economic laws, it can very easily be explained 
by the conditions which prevailed at that time. 

We have already called attention (page 359) to the fact 
that until a comparatively recent period, credit — the loan of 
money — could not possess a productive character ; it could 
serve, and as a matter of fact did serve, only for consump- 
tion. When, therefore, the ancients and the canonists 
condemned interest, as usurious, they were not so greatly 
mistaken as is sometimes supposed. They showed that they 
possessed an accurate knowledge of the economic state of 
their own times. 

The borrowers in those days were poor plebeians who 
asked the Roman patricians for means to buy bread, or im- 
pecunious knights who obtained their equipment for the 
crusades from the Jews or the Lombards of the Middle Ages. 
In both cases we have examples of personal, and therefore 
unproductive, consumption. When the time for settlement 
came, the debtors could pay neither interest nor capital; 
they were therefore forced to surrender themselves and their 
labor, and become the slaves of their creditors. 1 Under these 
circumstances, loans at interest led, on the part of the lender, 
to an abuse of the right of property, and from the bor- 
rower's point of view became an instrument of spoliation 
and destruction. This is sufficient to explain the old and 
stubborn prejudice against interest. 

In those days capital was scarcely known, even by name. 
(See page 118.) Land was almost the only kind of produc- 
tive wealth. Hence no one thought of denying the justice 
of rent for land ; for when a farm is leased, one can see the 

1 The houses of Roman patricians contained cellars that served as prisons 
(ergastula) for insolvent debtors. In the Middle Ages, Shakespeare's example 
of Shylock notwithstanding, customs became less severe ; a powerful but 
insolvent debtor was only required to send hostages to his creditor and to pay 
for their food, — which was still a very burdensome obligation. Does not this 
condition of things justify the canonists' saying, jus belli, jus usurae ? 



MEDIAEVAL VIEWS CONCERNING INTEREST 565 

income proceed, so to speak, from the soil itself in the shape 
of crops, and it was clearly felt that the rent paid to the 
landlord was not paid out of the tenant's pocket. But the 
same was not true of money, and it seemed perfectly correct 
to declare with Aristotle that money cannot produce more 
money. This was why St. John Chrysostom, contrasting 
the landlord with the capitalist, became indignant because 
the lender " practised a damnable kind of agriculture, reap- 
ing where he had not sown." 

Moreover, a proof that the arguments of the canonists 
were not pure casuistry consists in the fact that in all cases 
where it was plain that the borrower would obtain a profit 
from the use of the loan (by carrying on trade, for example), 
and where the lender incurred some risk, interest was con- 
sidered legitimate. 1 

Yet it might be objected that, since the canonists frankly 
admitted private property in capital, or at least in money, 
they ought also to have seen the force of such arguments as 
those contained in the preceding section, and admitted the 
legitimacy of interest. But this objection would not be valid. 
The loan of money necessarily implies the use of the money 
lent, i.e. its exchange for something else; and it seemed 
absurd to the canonists that the lender, after having given 
up the money lent, should exact a money-payment for its use. 2 

But if the lender transferred the full ownership of the 
amount to the borrower, and thus gave up all claim to his 
capital, they readily admitted the legitimacy of the resultant 

1 The Lateran Council of 1515 stated the matter with perfect clearness : 
' ' There is usury wherever there is profit which does not arise from something 
productive and which implies neither labor, nor expense, nor risk on the part 
of the lender." 

2 Albertus Magnus and Thomas Aquinas insisted that money cannot be 
used by one person and owned by another. A lender, they argued, is 
"therefore not entitled to compensation for the use of money loaned, but 
only to its restitution, since the fact of borrowing vested ownership in the 
borrower ; nor can he claim compensation for the time that elapsed between 
the act of lending and the restitution, for time belongs to God, and cannot 
be bought and sold. Therefore a loan must be either made outright, or else 



566 PRINCIPLES OF POLITICAL ECONOMY 

income of the creditor, for then the loan became an income- 
yielding investment. 

The Reformation naturally brought about a reaction against 
the canonical doctrine. Calvin showed a disposition to tol- 
erate loans at interest under certain conditions ; and in the 
eighteenth century two great French Huguenot jurists, 
Dumoulin and Saumaise, refuted the scholastic arguments 
against usury. 1 Yet not until we reach the scientific econo- 
mists, Turgot (" Memoire sur les prets d'argent," 1769) and 
Bentham ("Defence of Usury," 1787), is the economic doc- 
trine in favor of loans at interest firmly established. Econo- 
mists are now unanimous in its acceptance, and their opinion 
is well founded. Why ? Because the economic conditions 
of life are not what they were at the time of the Church 
Fathers and the scholastics. 

On the one hand, the parts have been inverted. To-day 
the impecunious do not usually borrow from the wealthy, 
nor the common people from the patricians; but the rich 
and powerful — speculators, gigantic corporations, banks, the 
owners of gold mines, and, above all, the governments of great 

in the form of a mortgage or bill of sale, and cannot involve a thing like 
money, the very nature of which is repugnant to the rules providing for com- 
pensation in cases of borrowing and lending." — Cossa, "Introduction to 
the Study of Political Economy." 

The student must bear in mind that the term usury originally meant use- 
money and was synonymous with our term interest, although to-day it is used 
to mean exorbitant or extortionate interest. 

1 It is interesting to note that the Jesuits contributed quite as effectively as 
the Protestants to the recognition of loans at interest as permissible. They 
invented subtle devices for avoiding the prohibitory law, such as the con- 
tractus trinus, a more or less fictitious contract by which the lender was 
regarded as a partner in the risks and profits of an enterprise, who insured 
himself against losses and gave up his claim to profits, in consideration of a 
fixed sum payable annually. 

Interest was also allowed in the form of a penalty for the failure to repay 
the loan at the specified time ; and as nothing prevented specifying the time 
for repayment as the day after making the loan, it was a very simple matter 
thus to elude the law. 

(For further details, consult Ashley, "Economic History," Chapter 7, 
and Boehm-Bawerk, " Capital and Interest," Vol. I.) 



THE CHANGED NATURE OF LOANS 567 

nations — most frequently borrow from the public, from the 
common people, and make up their funds out of the savings 
of the masses. The result is that oftentimes the lender is a 
worthier object of compassion than the borrower. Public 
opinion and the law are not needed to protect the weak and 
defenceless borrower against the rapacity of the lender, but 
rather to prevent the ignorant lender from being exploited 
by individuals and corporations that make a practice of 
borrowing enormous amounts from the general public, — 
of which modern financial history furnishes so many scan- 
dalous examples. 1 

On the other hand, — the two changes were concomitant, — 
the very nature of the loan contract became different from 
what it was. Men, as a rule, do not now borrow in order 
to obtain food, but in order to increase their wealth. 
To borrow for purposes of personal consumption is the ex- 
ception, and credit has assumed the true economic character 
of a method of production. 2 The entrepreneur, that is to 

1 " Everybody knows what brigandage is carried on to-day under the guise 
of founding stock companies. Nothing is more shameful or more criminal. 
It is one of the saddest symptoms of public demoralization. . . . The place 
of the great bands of adventurers and robbers who held merchants for ran- 
som, and pillaged the country in the Middle Ages, is now taken by stock 
companies, many of which carry on their operations with more security, more 
impunity, and more leisure and profit for their founders and directors than 
their mediseval compeers." — Leroy-Beaulieu in the Economists francais 
for July 21, 1881. 

2 This is not yet universally true. In the country districts, and especially 
in the farming regions of Russia, along the Danube, in Italy, in Algeria, etc. , 
credit still possesses its former nature, peasant borrowers being exploited and 
ultimately expropriated by money-lenders. This state of affairs has given rise 
to the anti-semitic movement, and shows that in some countries, and under 
certain conditions, the old laws against usury may be perfectly defensible. 

But even in these places agricultural credit associations, to which we have 
already referred (page 395), have begun to change the respective situations of 
debtors and creditors. 

In advanced countries, credit for purposes of consumption, i.e. borrowing 
money in order to spend it unproductively, is practised only by wealthy, 
prodigals and a few of those who patronize the pawnshops. We must, how- 
ever, place in the same category the governments of great nations, which, 



568 PRINCIPLES OF POLITICAL ECONOMY 

say, the real agent and director of production (see page 484), 
hires the capital and pays the interest ; and this interest is 
part of the cost of production just as much as the wages 
of labor or the rent of the factory. It would, therefore, 
be absurd to dispense, for humanitarian reasons, with the 
payment of interest ; for this would simply increase the 
entrepreneur's profits. 

Even to-day, however, laws concerning the loan of capital 
bear traces of the old condemnation of interest. Many of 
the states of the Union have so-called usury laws, which fix 
the maximum rate of interest, and declare that any excess 
above this rate shall not be recoverable. In only a few of 
them is a higher rate than twelve per cent allowed by law, 
despite the constant protests of economists, who would have 
the rate of interest determined by the forces of demand and 
supply, like wages and rent. 

IV. The Laws of Interest 

Early modern political economists took no particular pains 
to define the term interest. Indeed, many of the classical 
economists were unable to get a very accurate notion of 
the term, because of their failure to separate the earnings of 
capital per se from the remuneration due to the work of suc- 
cessful superintendence ; because, in other words, interest 
and profits were treated together under the general name of 
profits. In popular speech to-day, profits are sometimes 
made to include the interest of capital, as when a man not 
only directs an enterprise, but also supplies the capital re- 
quired to found it and carry it on. The two incomes here 
united, are, nevertheless, distinct ; if the director of the 
enterprise, i.e. the entrepreneur, were obliged to borrow his 

during the past century, have consumed, for the most part unproductively, 
and even in works of destruction, $30,000,000,000 of capital, for which 
the unfortunate taxpayers will pay interest forever, or at least until these 
governments are declared bankrupt. This class of borrowers is, to be sure, 
too powerful to need compassion ; it is the taxpayers that have a right to be 
pitied. 



PURE INTEREST 569 

capital, it would immediately become apparent that profits 
and interest are separate and different incomes. 

The distinction between profits and interest, however, is 
not the only one that economists have deemed it advisable to 
draw, in this connection, for the sake of clear thinking. They 
have found that the term interest is itself often applied to a 
composite of various elements ; they have therefore endeav- 
ored to remove from the concept of interest several elements 
which, in popular parlance, are included in that term. It 
follows, therefore, that the term interest means, in the 
vocabulary of economic science, something different from its 
customary acceptation. Pure interest, i.e. interest in the 
strictest economic sense of the term, which may be denned 
as the price paid for the use of capital, or, from the distribu- 
tive point of view, as the share of the capitalist in the product 
of industry, springs from the circumstance that the value of 
goods produced with the help of capital is greater than the 
value of the goods consumed in their production plus the 
cost of the labor employed. 

In the real world of business we rarely encounter interest 
pure and simple, but nearly always find it combined with 
other kinds of compensation, of which the following two are 
most frequently present : — 

(V) The cost of renewing fixed capital — for example, a 
house or a piano — the constant use of which involves wear 
and tear amounting to gradual destruction. The owner of 
borrowed capital must therefore receive, besides a payment 
for the use of the house or the piano, a sum sufficient to keep 
it in constant repair. 

(5) The payment for the risk attending the investment of 
capital. 1 

1 This element of risk, to which we refer again later, may depend, as 
Roscher points out, "on the doubtful reliability of the person to whom the 
capital is confided ; on the uncertainty of the branch of business in which it 
is intended to employ it ; or on the uncertainty of the commercial situation in 
general; but especially may it depend on the uncertainty of the laws." — 
"Principles of Political Economy," translated by Lalor, Vol. II, page 100. 



570 PRINCIPLES OF POLITICAL ECONOMY 

Whenever the transaction of loans involves exceptionally 
high expenses of management, as in the case of loans made 
by pawnshops, the term interest usually involves a third 
element, consisting of the charge due to these exceptional 
expenses involved in placing the loan. 

Whatever remains when these foreign elements have been 
removed constitutes pure interest. Pure interest, therefore, 
so nearly as we can approach it in reality, is that which 
would be paid for the loan of money, in large sums and for 
long periods, under conditions of absolute security. 

If capital were loaned in the shape of commodities, — such 
as factories, machinery, and other instruments of production, 
— and not in the shape of money, a different price would 
have to be paid for the loan or hire of each commodity, 
according to its quality, durability, and productivity, just as 
the rent of farms differs according to their fertility and acces- 
sibility. But capital is usually lent by means of money or 
of credit-instruments representing money, because the bor- 
rower prefers to receive money instead of goods, which may 
be ill' suited for the purposes that he has in view; and, 
furthermore, because capital is necessarily offered in this form 
by those who have saved wealth and want to invest it. Men 
do not usually save capital in the shape of commodities, but 
in the shape of money. 

This fact accounts for the frequency of the statement that 
interest is paid for the use of money. What the borrower 
really wants, however, is not money, but the goods that 
money will buy, — the goods needed to carry on a produc- 
tive enterprise. As Walker puts it : " One borrows $ 5000 
and gives a note for that sum, with interest. With 
this money, he purchases live stock, machinery for his fac- 
tory, or goods for his trade : these were what he wanted ; 
these were what he really borrowed ; these are what he 
really pays interest upon. The money was solely a means 
to that end." 

An important consequence of this fact, clearly perceived 



MONEY AND INTEREST 571 

by Hume long before Adam Smith published his " Wealth of 
Nations," is that the rate of interest does not depend on the 
amount of gold and silver that the country possesses, "but 
on the amount of its riches or stock." Yet it is still a popu- 
lar idea that the rate of interest, i.e. the price paid for the 
use of capital, depends solely or largely on the amount of 
money in the country. When interest is high, people say that 
money is scarce. When it is low, they declare that money 
is abundant. This idea is correct in the case of short-time 
loans, usually made by bankers to business men who have 
contracted debts in buying goods, and who must make pay- 
ment for them before they can be sold. These loans are 
usually made in the form of bank discounts. When money 
becomes "tight," banks find that their reserves diminish, 
and are obliged to curtail their loan and discount business 
by raising the interest on loans and increasing the rate of 
discount. 1 

But this idea is false in the case of long-time loans, the 
only kind which concerns us here in connection with the 
study of the capitalist's income. In refutation of the idea 
that an increase in the supply of money lowers the interest 
on permanent investments, while a decreased supply raises 
it, let it suffice to say that the income from loaned capital, 
as well as the capital itself, exists in the form of money, and 
that therefore the rate of interest, i.e. the ratio between 
income and capital, cannot be affected by a factor which, 
as a fluctuation in the value of money, operates equally and 
simultaneously upon both terms of the ratio. 

The substitution of money for commodities in loan-trans- 
actions, by which what would otherwise have been simply 
a case of hire becomes money-lending, or investment prop- 
erly speaking, involves two further consequences of great 
importance. 

In the first place, it introduces in the determination of 

1 We have already seen that there is a close connection between the supply 
of money and the rate of discount (page 388, etc.). 



572 PRINCIPLES OF POLITICAL ECONOMY 

interest (in the wide sense of the term) a new and im- 
portant element already referred to, viz. the solvency of the 
debtor. If the debtor's solvency, that is, his ability to meet 
his obligations, is doubtful, this involves additional risk for 
the lender, and will lead him to demand higher interest to 
counterbalance the possibility of losing his capital. This 
premium for insurance against the risk of loss * — the lender 
furnishing his own insurance — accounts almost entirely for 
variations in the rate of interest on different investments. 

In the second place, it tends, when there is equal security 
and perfect mobility of capital, 2 to eliminate all other causes 
of variation in the rate of interest and to equalize the cost of 
borrowing any or all kinds of capital. The different em- 
ployments of capital tend uniformly to pay the same rate of 
interest, for if one branch of business is much more profit- 
able than another, capital is allowed to flow into the former 
and out of the latter until a level is reached. Money-capital, 
we have already learned, can be sent almost without cost 
from any part of the world to any other part. All kinds of 
capital, therefore, being lent and borrowed in the form of 
money, are on the same footing; qualitative differences dis- 
appear, and only quantitative differences remain. 3 

1 This is what the Germans aptly call Bisikopramie. 

2 We have already said, elsewhere, that the assumption of perfect mobility 
and perfectly free competition is more likely to be realized in regard to money- 
capital than in regard to most other commodities. Yet the fact that there 
are differing rates of interest in different markets, even for investments offer- 
ing precisely the same degree of risk, shows that competition is not perfect. 
The causes for this must be found in the disinclination of capital to emi- 
grate, the inertia of capitalists or borrowers, the lender's or borrower's 
ignorance of the money-market, or the pressing nature of the borrower's 
need for capital. 

3 There would seem to be no differences of durability so long as capital is 
in the form of money. When capital is concrete, i.e. when it exists in the 
shape of productive goods, the cost of its maintenance is an important matter, 
and something must be paid — in addition to the cost of its use — for the 
" wear and tear" to which such capital is subjected. Money-capital being 
by nature indestructible, and undergoing no wear and tear, all differences in 



SUPPLY AND DEMAND IN CAPITAL 573 

It follows from what has been said regarding the excep- 
tional mobility of money-capital, that there is at a given 
time but one and the same rate of interest in the money- 
market of a whole nation, or even of the whole world. 

The question now arises : What are the natural economic 
laws which determine this general rate of interest, i.e. the 
price paid for the use of money-capital ? Unlike the question 
concerning the fundamental reasons for the. existence of in- 
terest as a category of income, — a question with* regard to 
which Boehm-Bawerk divides political economists into six 
separate and distinct groups or tendencies, 1 — there is con- 
siderable agreement among economists with regard to this 
subject. We have a pretty fair idea of the causes affecting 
the general rate of interest. We cannot, to be sure, attribute 
its determination to any single cause, any more than we 
succeeded in discovering a single determinant of the value 
of goods (page 64) or of the price of labor (page 521); 
there are really many factors, which may be summed up in 
the old formula of supply and demand or in the newer doc- 
trine of final utility. 

In this connection, as, indeed, in every attempt to inter- 
pret it scientifically, the formula of supply and demand re- 
quires some explanation. 

The supply of capital, seeking investment in the form of 
money and credit instruments, depends on the following 
factors : (a) On the nation's capacity for saving, promoted 
by good institutions to facilitate the storing of wealth and 
good credit institutions to provide investment for the capital 
thus created. (5) On the security afforded to investors ; if 

the cost of capital that are due to this necessity for maintaining the value of 
concrete capital should disappear. 

For the borrower of capital, the matter is different. He must return the 
capital at the end of a certain period, say ten years ; for him, this is equiva- 
lent to its destruction in that space of time. If he is a careful business man, 
he will provide for the renewal of the capital just as though it existed in the 
shape of concrete goods. All industrial firms act on this principle. 

1 See page 558. 



574 PRINCIPLES OF POLITICAL ECONOMY 

this is lacking, the economized wealth will not be put on the 
loan-market, but hoarded unproductively. (c) On the ex- 
istence of a large class of persons unable or unwilling to 
utilize their own capital in active business ; for it is evident 
that when every member of society employs his own capital, 
capital will not be offered on the market, no matter how 
abundant it may be. 

The demand for capital, on the other hand, is determined 
by its productivity. 1 Unlike the cost of hiring land, which 
depends so largely on the fertility of each particular farm, 
we are, in the case of loans in capital, not concerned with 
the productivity of this or that particular kind of capital ; 
we are not considering capital in the form of goods, but capi- 
tal in genere, capable of being transformed into any kind of 
commodity ; we are, in other words, concerned with capital 
as a mobile, homogeneous fund. Professor J. B. Clark, 2 who 
has probably done more than any other economist to distin- 
guish this concept of capital from the idea of capital as a 
sum of concrete commodities, contends that it is not money, 
nor even materials, machines, or buildings that the capitalist 
lends, but a sort of general draft upon society, — value in 
a readily convertible form ; a sort of abstract fund which the 
entrepreneur converts into concrete capital. 

In a new country possessing an abundance of natural 
resources, virgin lands to be brought under cultivation, 
mines to be worked, and roads to be built ; or even in an old 
country in times of great industrial progress, such as the 
middle of the nineteenth century, — this general state of 
productiveness will, as experience has shown, cause a great 
increase in the rate of interest. 

But whether a country be new or old, as long as there is 
any advantage in the employment of capital, or of increased 

1 "When loans are made for purposes of consumption, the productivity of 
the capital is of course out of the question, and the rate of interest is limited 
only by the need of the borrower ; hence it may become exorbitant. 

2 Annals of the American Academy, July, 1890. 



THE PRODUCTIVITY OF CAPITAL 575 

quantities of capital, in any branch whatever, the demand 
for capital will continue to increase. The point beyond 
which the use of additional capital would not be advan- 
tageous has never been reached in the industrial life of any 
nation; nor is it likely ever to be reached. In economic life, 
therefore, we find, on the one hand, a practically unlimited 
demand for capital for productive purposes, and, on the other 
hand, a supply of capital insufficient to satisfy the demand. 
This circumstance is of the utmost importance in determining 
the rate of interest. Wherever the supply of any commod- 
ity is not fully equal to the demand (in the widest sense of 
that term), part of the demand must forego satisfaction ; it 
remains, so to speak, "potential." Capital will, of course, 
first seek those investments in which the returns are greatest 
and surest ; and whatever capital is not thus employed must 
turn to less and less productive uses. 

Let us suppose that the earliest and most productive uses 
yield an interest of ten per cent, whereas subsequent invest- 
ments of capital yield decreasing returns, until we find that 
the best rate the capitalist can obtain for additional capital 
is three per cent, 1 because no entrepreneur is willing to pay 
more for its use under existing conditions of production. 

1 This must not be supposed to imply that the supply of capital necessarily 
increases more rapidly than the new opportunities for its investment, and that 
therefore the rate of interest is bound to fall continually. (See the next sec- 
tion.) This may or may not be the case. In a progressive nation it is not 
unlikely that possibilities of new and more profitable investments for capital 
will be offered from time to time. If this be the case, and the supply of 
capital fails to increase rapidly enough to permit carrying on all the old as 
well as all the new enterprises, capital will be removed from some of the 
former to the latter ; hence the marginal utility of capital (the productivity 
of the increment of capital which is applied least productively, but which 
the owner nevertheless continues to apply) may be greater than before, and 
thus cause a rise in the rate of interest. 

The important point is that some capital is less productively employed than 
all the rest. Yet interest must be paid for it ; and as there can be but one 
price for all the increments of a uniform commodity, i.e. one rate of interest 
for capital in genere, this rate will be that paid for the capital engaged least 
productively, whether it be " old" or " new." 



576 PRINCIPLES OF POLITICAL ECONOMY 

New capital, if invested at all, will have to be invested at 
this rate. But will those entrepreneurs who borrowed capital 
at ten per cent continue to pay this interest for a commodity 
now obtainable at three per cent ? Evidently not ; and there- 
fore, sooner or later, all capitalists will have to be satisfied 
with three per cent. As Roscher puts it, the rate of interest 
is determined by the "return from the least productive 
application of capital which must nevertheless be made in 
order to find investment for all the capital that seeks it"; 
or as Yon Thuenen, the acknowledged founder of this law, 
formulated it, interest is determined by the return secured 
"from the last increment of capital that is employed 
productively." 

Interest resembles wages and rent in the respect that the 
lender of capital, as well as the laborer and the landlord, con- 
tracts for a specific sum, agreed on in advance and in no wise 
influenced by the outcome of the productive enterprise in 
which his goods or services are applied. In return for a fixed 
annuity, expressed in per cent of the sum loaned (which is 
called the " principal "), the capitalist relinquishes all claim 
to a share in the profits of the enterprise. 

There are, however, lenders who would rather share the 
chances of profit and loss in an enterprise than be satisfied 
with a fixed but sure compensation. For such as these, 
modern credit has devised an arrangement by which the 
borrower, instead of guaranteeing a fixed return, agrees to 
pay the lender a share of the profits if there are any, or pay 
nothing at all if there is no surplus above costs. If there 
are actual losses, these are met with the creditor's capital. 
Under this arrangement the credit instruments owned by 
the lender do not belong to the category of bonds or notes, 

1 A statement of Von Thuenen's theory may be found in Boehm-Bawerk's 
" Capital and Interest," and in an essay on " Thuenen's Wertlehre " by the 
translator of this volume. A later form of the same theory, developed by 
Professor J. B. Clark, is summarized and criticised by Macfarlane in " Value 
and Distribution." 



THE RATE OF INTEREST 577 

but are called shares of stock, and the income derived there- 
from is not called interest, but dividends. Dividends should, 
of course, be greater than interest, because they constitute a 
more hazardous kind of income and partake of the nature of 
profits. We shall again discuss this subject when we take 
up Profits. 

V. Does the Rate of Interest tend to Fall? 

If it be desirable that wages shall increase, it is, on the 
other hand, equally desirable that the rate of interest shall 
fall. 

This is desirable, first, from the standpoint of distribution. 
It would reduce the share of the total product that is appro- 
priated by capitalists as such, and would thus increase, by 
so much, the share that may go to the other participants 
in production, including the laborer. Besides, the rate of 
interest determines not only the income of capitalists ; 
indirectly, it also influences profits, the rent of buildings, 
and even the rent of land ; in other words, it affects the 
entire income of the propertied classes. 

It is desirable, secondly, from the standpoint of produc- 
tion. By constantly lowering the cost of getting capital, 
and thus diminishing the cost of production, it facilitates 
the completion of enterprises that are otherwise impos- 
sible. Here, let us say, is a piece of land that needs to 
be cleared, or houses that ought to be built to provide 
homes for workingmen; but everybody knows that neither 
the land nor the houses would yield more than three per 
cent. If, therefore, the current rate of interest is five per 
cent, it will be impossible to find capital for these undertak- 
ings, inasmuch as they can be carried out only at a loss. 
Hence they will not be attempted. But suppose the rate of 
interest falls to two per cent. We should immediately push 
forward the execution of these enterprises. Turgot, in a 
celebrated figure, compared a fall in the rate of inter- 



578 PRINCIPLES OF POLITICAL ECONOMY 

est to a falling sea-level, which makes it possible to bring 
more land under cultivation. 

But it is not sufficient to show the desirability of a fall in 
the rate of interest. We must ask whether it is likely to 
occur. Is it of a permanent nature ? Can it, moreover, be 
regarded as a true, natural, economic law, like that of the 
increasing value of land or even that of the decreasing value 
of metallic money ? 

Political economists, especially those of the French opti- 
mistic school, from Turgot down to Leroy-Beaulieu, have 
answered these questions affirmatively. Bastiat regarded 
the law of a falling rate of interest as among the most re- 
markable of "economic harmonies." 

This opinion is defended both by theory and fact. We 
shall briefly state the considerations in its favor. 

As a matter of fact, there has been a noteworthy decline in 
the rate of interest ; it has fallen during the past thirty or 
forty years from six and seven to three and four per cent. 
This is one of the most characteristic economic phenomena 
of the second half of the nineteenth century. 

The theoretical argument is that in a progressive country, 
capital, like all kinds of artificial wealth, will constantly 
grow more and more abundant, and that its final utility 
and value must consequently continue to decrease. The 
security of investments, moreover, is constantly increasing, 
at least if we admit that progress means greater faithfulness 
on the part of individuals in the fulfilment of business engage- 
ments, and, on the part of governments, more effective means 
of enforcing credit claims. If, therefore, capital is becoming 
more abundant, and investments are becoming more secure, 
there are grounds for believing that capital will become less 
productive and bring less revenue to its owners. There are 
valid reasons for believing that the returns from agriculture 
will decrease by virtue of the law of diminishing returns, 
while those of industry and transportation will decrease 
because the opportunities for the employment of capital in 



THE FALLING RATE OF INTEREST 579 

these branches are limited. It is, for example, undeniable 
that the railroads still to be built in this country will be 
much less productive than the great lines already con- 
structed. Thus, of all the factors that must be taken 
into account, there is not one that does not lead us to expect 
a permanent and continual, although perhaps a gradual, fall 
in the rate of interest. 

There would even appear to be no assignable limit to 
this decline ; for there is here no minimum limit such as that 
which we encounter in the case of commodities, — the value 
of which cannot long remain below the cost of production, — 
or in the case of wages, — which cannot fall below the cost 
of the laborer's subsistence. The sole minimum limit to the 
rate of interest is that below which the capitalist would be 
unwilling to lend, and would prefer either to hoard or to con- 
sume his capital. Now what is the rate below which he would 
prefer either to spend his savings or keep them under lock 
and key ? Is it one per cent or one per thousand ? This is 
a question that no one can answer. 1 

These are the arguments of those who prophesy a constant 
decline in the rate of interest ; but none of them, in our 
opinion, is conclusive. 

In fact, the very suddenness and extent of the decline 
which the rate of interest for money has undergone in less 
than a generation is sufficiently indicative that this is not one 

1 Bastiat declares that interest may fall below any assignable quantity, 
without, however, reaching zero, — thus resembling the curves, known to 
mathematicians as asymptotic, which continually approach a straight line 
without ever touching it. Mr. Foxwell, an English economist, has even gone 
so far as to assert that the time will come when capitalists, instead of receiving 
interest from those to whom they intrust their money, will pay them for 
keeping it. This would mean the realization of Proudhon's dream of 
"gratuitous credit," which has been so thoroughly ridiculed. 

It is only fair to add that Mr. Foxwell refers especially to loans made to 
banks in the shape of deposits. And in this case it is quite possible that, in 
consideration of the service which they render depositors, banks may not 
only pay no interest, but exact the payment of a compensation for safe-keep- 
ing. This was what they did formerly. 



580 PRINCIPLES OF POLITICAL ECONOMY 

of those great historical changes that constitute economic 
evolution, but a temporary and probably periodic oscillation. 
History, indeed, confirms this supposition. Under the Roman 
Empire the rate of interest was no higher than in the middle 
of the nineteenth century; and in the eighteenth century in 
Holland it fell as low as it is to-day. The present period 
of decline, moreover, seems already to be at an end ; for 
since 1899 there has been a noticeable rise in the rate of 
interest, or (what amounts to the same thing) in the rate of 
capitalization for the principal kinds of investments. 

The prophecies regarding a decrease in the risks incurred 
by capitalists and the diminished productivity of capital are 
of doubtful validity. Consider, first, the risks of investment. 
Can it be said that there are to-day fewer insolvent debtors, 
fewer business failures, fewer enormous swindles, smaller 
amounts of capital sunk in hazardous enterprises, than 
formerly? Are we justified, then, in concluding that things 
will be different in the future ? 1 

With regard to the productivity of capital it is certain 
that if we consider a particular industry, such as that of 
railroad transportation or gas illumination, there is a limit 
to its development. But we must consider production in 
general, and note that old industries are constantly making 
room for new ones. Nothing sanctions the assumption, for 
instance, that transportation by balloon will not be as re- 
munerative as transportation by railroads, or that illumina- 
tion by electricity or acetylene will be less profitable than 
illumination by gas. 2 

1 We must even take into account some new risks, such as that due to 
strikes, and consider the increasing burdens which the laws tend to impose 
upon employers, capitalists, and landlords. 

2 Professor Paul Leroy-Beaulieu, the most ardent advocate of the doctrine 
of a continual decline in the rate of interest, develops the productivity argu- 
ment in great detail, and attaches great importance to it ; yet this argument, 
founded in the last analysis on a pessimistic idea, — that of an unavoidable 
limit to the progress of human industry, — does not seem to harmonize very 
well with the optimistic views held by this author with regard both to pro- 



GRATUITOUS CREDIT 581 

In short, what seems to us most likely is that the rate of 
interest will rise again, after having reached a certain mini- 
mum level which we are doubtless not far from having 
attained. The reaction, in fact, has already begun. It is 
probable that in the future the rate of interest will pass 
through long alternating periods of rise and fall, just as it 
has done in the past. 

A steady and uninterrupted decline in the rate of interest 
might be brought about, and Proudhon's dream of gratuitous 
credit realized, not through the operation of supposed natu- 
ral laws concerning this matter, but through the rational 
and persevering effort of men combined into mutual credit 
associations. 1 This would, indeed, be a most sensible form 
of collectivism ; for if everybody could obtain the use of 
capital almost gratuitously, what would be the objection to 
the individual ownership of capital ? 

duction and to distribution. This contradiction is revealed in a curious 
manner by the fact that Leroy-Beaulieu, who alleges the decreasing pro- 
ductivity of capital, refuses to admit the law of diminishing returns in 
agriculture, and rebukes Ricardo and Mill for accepting it. 

1 Consider in this connection the organization of Raiffeisen banks, dis- 
cussed on page 395. 



CHAPTER III — THE RENT OF LAND 

I. The Law of Rent 

Does land yield a revenue ? The question seems almost 
absurd. It is a self-evident truth that all land, except under 
abnormal circumstances, yields something ; and if any proof 
of this were needed, the fact that land may be sold or rented 
ought to be sufficient, for it is plain that land would find no 
tenant or purchaser (except for purposes of pleasure) if it 
yielded no return. 

But that is not the real question. We want to know 
whether there is a surplus income that is peculiar to the 
land, separate and distinct from the return for labor and the 
return for the use of capital. 

Some economists deny the existence of such a separate 
and distinct return. They maintain — we shall see how 
they try to prove it — that the revenue from land is nothing 
but the product of capital put into the land by its owner or 
his predecessors; and that in the last analysis the return 
from land is necessarily made up of wages, interest, and 
profit. But this theory is not generally accepted ; it seems 
to be inspired primarily by a desire to justify and defend 
private property in land. 

The classical economists looked at this matter differently. 
The Physiocrats, and even Adam Smith and J. B. Say, re- 
garded the return from land as really due to natural, pro- 
ductive qualities of the soil ; and if the landlord profits by 
these qualities, this is simply because property in land con 
stitutes a genuine monopoly, a privilege which gives him 
control of the forces of nature and the fruitfulness of the 

582 



RICARDO S THEORY OF RENT 583 

soil. They defended this monopoly, moreover, on grounds 
of public utility which we shall examine presently. 

The landlord may either take advantage of this natural 
source of wealth himself, by selling the products of the land, 
or he may transfer the privilege of exploitation to some one 
else in exchange for a regular money-payment resembling 
that received by the capitalist for the use of his capital. 

This explanation of the revenue from land implies the 
idea that nature can create value ; it implies adherence to 
the doctrine that value is based on utility — in the material 
sense of this term. 1 

Such an explanation could not satisfy the acute mind of 
Ricardo. We know that this great economist was the prin- 
cipal author of the theory according to which value depends 
on labor and the cost of production. Therefore he could 
not, on the one hand, without demolishing this whole theory, 
admit that the value of land or of its products is created 
partly by nature. Nor could he, on the other hand, hold 
that the return from land represented nothing more than 
the labor of cultivation; for everybody knew that land, 
especially in England, could be hired to tenants, who, after 
paying rent for it out of the product of the soil, still had 
enough left to live on and to pay all the expenses of 
cultivation. In order to escape this dilemma, Ricardo in- 
vented his celebrated theory of land-rent, which has served 
for more than half a century as the subject of innumerable 
discussions among economists. 

Originally, says Ricardo, as men were obliged to cultivate 
only a small section of land, they chose the best plots. 2 

1 This was evidently Adam Smith's meaning when he said: "In agri- 
culture, nature labors along with man;" the share due to her help "is 
seldom less than a fourth, and frequently more than a third, of the whole 
produce." 

2 At the risk of tedious repetition, we here quote Ricardo's own words 
concerning the fundamental part of his theory. 

" On the first settling of a country, in which there is an abundance of 
rich and fertile land, a very small proportion of which is required to be cul- 



584 PRINCIPLES OF POLITICAL ECONOMY 

Still, despite the fertility of these plots, their cultivation did 
not yield a greater income than could have been obtained 
from any other employment of labor and capital ; as there 
was plenty of land to be had for the taking, land and its 
products were subject to the law of competition, which re- 
duces the value of all commodities to the level of the cost 
of production. 

But the increase of population necessitates an increase of 
production ; and when all the land of the first quality has 
been appropriated, less fertile land must be put under cultiva- 
tion ; that is to say, land on which the cost of production is 
higher. Let us suppose that land of the first degree yields 
30 bushels of wheat per acre, at an outlay of $30, or $1 
per bushel. Then land of the second degree will produce, 
let us say, only 20 bushels for the same expenditure, and 

tivated for the support of the actual population, or indeed can be cultivated 
with the capital which the population can command, there will be no rent ; 
for no one would pay for the use of land, when there is an abundant quantity 
of it not yet appropriated, and, therefore, at the disposal of whosoever might 
choose to cultivate it." 

" On the common principles of supply and demand, no rent could be paid 
for such land, for the reason why nothing is given for the use of air and 
water, or for any other of the gifts of nature which, exist in boundless quan- 
tity." " If all land had the same properties, if it were unlimited in quantity, 
and uniform in quality, no charge could be made for its use, unless where 
it possessed peculiar advantages of situation. It is only, then, because land 
is not unlimited in quantity and uniform in quality, and because in the 
progress of population, land of an inferior quality, or less advantageously 
situated, is called into cultivation, that rent is ever paid for the use of it. 
When, in the progress of society, land of the second degree of fertility is 
taken into cultivation, rent immediately commences on that of the first qual- 
ity, and the amount of that rent will depend on the difference in the quality 
of these two portions of land." 

' ' With every step in the progress of population which shall oblige a coun- 
try to have recourse to land of a worse quality, to enable it to raise its supply 
of food, rent, on all the more fertile land, will rise." 

"The exchangeable value of all commodities [and therefore the price of 
agricultural products] is always regulated by those who continue to produce 
them under the most unfavorable circumstances ; meaning, by the most 
unfavorable circumstances, the most unfavorable under which the quantity 
of produce required renders it necessary to carry on the production." 



RICARDO'S THEORY OF RENT 585 

the cost of production per bushel will be $1.50. It is clear 
that the owners of this land will not be able to sell their 
wheat for less than $1.50, for any lower price than this 
would involve loss, and they would cease raising wheat. 
We assume, however, that the population cannot get along 
without them. It is equally clear that those who produce 
on land of the first degree will not consent to sell their wheat 
at a lower price than their neighbors. They, too, will sell 
it at $1.50 per bushel. But as it still costs only $1 to pro- 
duce, they will now realize a gain of 50 cents per bushel, or 
$10 per acre ; and. this gain is precisely what, in Ricardo's 
theory and in the recognized vocabulary of political economy, 
is called rent. 

At a later stage, as population continues to grow and to 
require an increased supply of the means of subsistence, men 
are obliged to cultivate lands of even inferior quality, 1 — 
lands, for example, that will yield only 15 bushels of wheat 
per acre. 2 This means an outlay of $2 per bushel. For 

1 Or, lands of inferior accessibility. Given, two farms of uniform fertility 
(whose product is necessary to satisfy the demand for wheat in a given com- 
munity) , one of which is twice as far away from the market as the other, so 
that the cost of transporting a bushel of wheat from one to the market 
is 50 cents more than when the wheat is brought from the other farm ; here, 
clearly, the second farm has an advantage involving the same consequences 
as greater fertility. 

Differences in accessibility may be quite as important as differences in 
fertility. Especially in the case of land in or near cities, this is an important 
element even for agricultural purposes. Although Ricardo saw its impor- 
tance, von Thuenen was apparently the first author to appreciate its full 
significance and fully to discuss, in connection with accessibility and rent, 
the influence of transportation facilities. 

2 Why is it assumed that men will be obliged, in order to increase produc- 
tion, to bring new land under cultivation ? Can they not increase the output 
by applying better, more intense methods to the good land already cultivated ? 
There is no doubt that they can. But, by virtue of the law of diminishing 
returns, every increase in the yield, beyond a certain limit, means more than 
proportionate increase of outlay, and will consequently involve a rise in the 
cost of production. Take the land yielding 30 bushels at an outlay of $30 
per acre. We might, perhaps, succeed in getting 60 bushels per acre out of 
this land, but it would mean an expenditure of $80 or $90, — certainly more 



586 PRINCIPLES OF POLITICAL ECONOMY 

reasons stated above, this will be the price for all the wheat 
on the market. Henceforward the owners of land of the 
first category will have a surplus or rent of $1 per bushel, or 
$30 per acre, and the owners of land of the second category 
will begin to receive a surplus or rent of 50 cents per bushel, 
or $10 per acre. 

This " order of cultivation," as Ricardo calls it, may go on 
indefinitely, always causing a rise in the price of food, to the 
detriment of consumers, and an increase in rent, to the bene- 
fit of landlords whose income is augmented without any 
effort on their part, and whose prosperity has its source in 
the impoverishment of the rest of the community. 1 

In Ricarclo's theory we must take it for granted — and 
this assumption has given rise to numerous objections — 
that there is always some land for which no rent is paid in 
the strict sense of the term, i.e. land which yields no return 
except for the capital and labor expended on it. This is the 
land, however, that plays a decisive part in the determination 
of rent, inasmuch as it serves as the standard, as the basis of 
comparison with other lands. The income of all these other 

than $60, —and the cost of production would rise to $1.30 or $1.50 per 
bushel. The ultimate result would thus be the same whether we bring new 
land under cultivation or apply a more careful and costlier system of agri- 
culture to the old land. 

In this connection the section on the Law of Diminishing Eeturns should 
be re-read (page 92). 

1 Ricardo's whole theory was aimed, in the opinion of Professor S. N. 
Patten (who has made a careful study of the work of the English economist), 
at the controlling political power of British landlords three-fourths of a cen- 
tury ago. "Nothing," says Ricardo, "is more common than to hear of the 
advantages which the land possesses over every other source of useful pro- 
duce, on account of the surplus which it yields in the form of rent. Yet 
when land is most abundant, when most productive, and most fertile, it 
yields no rent ; and it is only when its powers decay, and less is yielded in 
return for labor, that a share of the original produce of the more fertile 
portions is set apart for rent. It is singular that this quality in the land, 
which should have been noticed as an imperfection, compared with the 
natural agents by which manufactures are assisted, has been pointed out as 
constituting its peculiar pre-eminence." 



RENT AND PRICES 587 

lands is due, not precisely to their fertility (for if each plot 
were alone under cultivation, not even the most fertile would 
yield a surplus, for the reasons that we have stated), but to 
their relative fertility, i.e. to the comparative barrenness of 
competing lands ; rent is not due to the generosity of nature, 
but to her niggardliness. The owner of a fertile plot of land 
occupies a privileged position. He enjoys, as it were, a 
monopoly ; but a monopoly of a peculiar kind, which does 
not consist in being able to sell above the market price, but 
in being able to produce cheaper than the market price. It 
may be objected that this is a distinction without a difference. 
But this objection is not valid ; for while the ordinary mo- 
nopolist causes a disadvantage to the public by screwing up 
prices, the landlord who receives rent must abide by the 
price fixed in the market by forces that are beyond his control. 
Even if a spirit of generosity should prompt all the owners 
of wheat farms to relinquish their rent, the current price of 
wheat would not fall one cent ; such conduct would simply 
amount to a gift to their tenants or those who happened to 
buy the wheat first. 1 

In other words, prices are not high because rent is paid, 
but rent is paid because prices are high. Rent is not the 
cause, but the effect of the price. 2 

1 In this statement we have in mind the present system of private prop- 
erty ; for things would be different under a system of common ownership. 
If society collectively owned all the land, it would be possible to establish 
an average price somewhat lower than the cost of production on the poorer 
lands and somewhat higher than that on the better lands, thus balancing the 
losses on the former by the gains on the latter in such a way as just to cover 
the total costs. It cannot be denied, on theoretical grounds, that this would 
mean a reduction of the price. 

2 Says Ricardo : " Corn is not high because a rent is paid, but a rent is 
paid because corn is high." 

The same idea may be expressed by the celebrated formula : Bent is not 
part of the cost of production. Wages and interest alone constitute the cost 
of production ; indirectly, under the pressure of free competition, they consti- 
tute the value of the product. 

From this theory the interesting conclusion is drawn that one might confis- 
cate the entire rent of land by taxation, without affecting the price of cereals. 



588 PRINCIPLES OF POLITICAL ECONOMY 

This theory of land-rent is now somewhat out of favor. 
Economists of the liberal school regard it as dangerous to 
the right of private property, whereas socialists find it too 
pessimistic with regard to the future of production. 

Yet we must accept the theory as true in its general fea- 
tures, — except the historical order of cultivation, which seems 
to be an a priori hypothesis. Although Ricardo regarded 
this " order " as the very basis of his theory, it is by no means 
an essential part of it. 1 

Here, let us say, are a hundred bushels of wheat offered 
for sale in any European market. It is clear that they have 
not all been produced under the same conditions. Some of 
the wheat was raised with the help of much fertilizer and 
intense labor ; some of it grew on fertile land almost of its 
own accord. Some of it came from San Francisco, after 
passing round Cape Horn ; the rest of it, possibly, came 
from a near-by farm. If each bushel, therefore, bore a 
label indicating its cost of production, there would probably 
not be two bushels bearing the same figures. Their original 
cost of production might easily range, for example, from 25 
cents to $2. 

But we know, on the other hand, that for goods of the 
same kind there can only be one and the same price. (See 
page 187.) The price of all the wheat must there- 

1 By a theory which is diametrically the opposite of Ricardo's, and which 
was celebrated for a time, the American economist Henry C. Carey at- 
tempted to show that the "order of cultivation" is precisely the inverse 
of that laid down by Ricardo. The most fertile lands, says Carey, are those 
most difficult to clear because of this very fertility, which results in exuber- 
ant vegetation, huge forests, and marshes giving rise to miasma and fevers. 
The best lands cannot, therefore, be brought under cultivation until agricul- 
ture has made considerable progress and is in possession of powerful instru- 
ments and advanced methods. 

This theory is true for a young nation. It was true for the United States 
at the time Carey propounded it. It is no longer applicable to the United 
States of to-day, and it ceased many centuries ago to be applicable to Euro- 
pean nations. It would be absurd now to maintain that the most fertile 
land in France or England is that which still remains to be cultivated. 



THE PECULIARITY OF RENT 589 

fore be the same. How, then, — the cost of production being 
different in each case, and the selling-price being the same, 
— is the connection established between the uniform selling- 
price and the cost of production ? 

The answer is this : The selling-price coincides with the 
cost of production only in the case of that bushel of wheat 
which cost most to produce. In the example chosen above, 
this would be the bushel that cost $2. The reason for this 
is plain. The selling-price must be at least sufficient to 
cover the expense of production borne by the unfortunate 
seller who raised his wheat under the most unfavorable con- 
ditions of production ; for if it were not so, this producer 
would no longer raise wheat for the market ; and, as we 
assume that the quantity of wheat is not greater than the 
effectual demand for it, it would be impossible to dispense 
with this last producer. 

We may therefore formulate this proposition : — 

Whenever like products are sold in the same market, the 
value of all tends to coincide with the maximum cost of pro- 
duction. 

Now it is plain that this price of $2 will mean a gain for 
all wheat-producers whose cost of production is less than 
this amount ; a gain of $1 for him whose wheat cost $1 to 
produce, of 80 cents for him whose wheat cost 11.20, of 50 
cents for him whose wheat cost $1.50, — and so forth. 
This gain or surplus is called rent, in the economic sense of 
the term. It is of a peculiar nature that distinguishes it 
from profit, because, on the one hand, it is wholly beyond 
the influence of competition, and because, on the other 
hand, it is due to forces absolutely independent of the con- 
duct of him who receives it. The landlord plays a purely 
passive part ; he profits by circumstances, but does not create 
them. 1 

1 It was Anderson, a Scotchman, who first expounded the law of rent 
(1777). But Ricardo has taken all the glory of its discovery. Both of them 
considered it applicable only to agricultural products, but it really constitutes 



590 PBINCIPLES OF POLITICAL ECONOMY 

As used popularly, the term rent is applied to what- 
ever is annually paid to a landlord by his tenant. This is, 
of course, a much wider use of the term than Ricardo would 
sanction, for it really includes other elements than economic 
rent. 1 

When the farmer is his own landlord, there is no regular 
payment either of money or goods. Yet there is rent, in the 
economic sense of the term, wherever there are differences 
in the fertility or accessibility of land, no matter whether 
or not the land is owned by those that cultivate it. 

II. The Unearned Increment of Land 

Although the historical " order of cultivation " laid down 
by Ricardo must be rejected, the essential fact which this 

a universal economic phenomenon. Whenever like products are sold at the 
same price, rent, which is really simply the difference between the cost of 
production and the selling-price, goes to those who have produced goods 
under favorable circumstances. 

In manufactures, however, this phenomenon occurs only temporarily, 
because in this branch the most favorably situated producers are able to 
satisfy the whole demand by increasing their output indefinitely. Instead of 
utilizing their position of vantage by continuing to sell at the old prices, 
they prefer to lower prices, undersell their competitors, and drive them 
gradually from the market. They thus make less profit on each article 
sold, but greater total profits. (See page 194, note 1.) 

In this case the general market price is not determined by the maximum 
cost of production, but by the minimum cost of production, — a result which 
constitutes a great advantage for the public. 

1 Ricardo makes this clear by an example. If, of two adjoining farms of 
the same extent and of the same natural fertility, one had all the conven- 
iences of farming buildings, and, besides, were properly drained and manured, 
and advantageously divided by hedges, fences, and walls, while the other 
had none of these advantages, more remuneration would naturally be paid 
for the use of one than for the use of the other ; yet in both cases this remu- 
neration would be called rent. But it is evident that a portion only of the 
money annually to be paid for the improved farm would be given for the 
natural properties and advantages of the soil ; the other portion would be 
paid for the use of the capital which had been employed in ameliorating the 
quality of the land and in erecting such buildings as' were necessary to 
secure and preserve the produce. 



THE UNEARNED INCREMENT 591 

hypothesis merely served to emphasize, viz. the spontaneous 
and in a sense inevitable increase in the value of land and in 
the revenue arising therefrom, nevertheless remains true. 
We must bear in mind that land is a kind of wealth sui 
generis, and has three characteristics which no other wealth 
possesses in the same degree. These are : — 

(1) It provides for the satisfaction of human wants that 
are essential and permanent. 

(2) It is limited in quantity. 

(3) It lasts forever. 

In view of these facts we can easily understand why the 
value of the land and of its products increases constantly, — at 
least in a progressive society, — and how almost all the forces 
of economic and social progress contribute to its increase. 

The growth of population is the principal cause of increas- 
ing rent, because the more people there are, the greater the 
quantity of food that the land must produce for them, and 
the wider the area they will require to live upon. 1 But the 
general accumulation of wealth, the building of highways 
and railroads, the rise of great cities, and even the develop- 
ment of public order and safety, also inevitably contribute to 
increase that surplus value of land which English economists 
designate by the significant name of unearned increment. 2 

1 Henry George has eloquently developed the theory that the value of the 
land is directly proportionate to the population that lives upon it. 

As land is the ultimate source of nearly all raw materials, the increased 
consumption of almost any kind of wealth means greater demands upon the 
land. Blatchford, an English socialist, puts this rather forcibly when he 
says : — 

" All wealth comes from the land — all flesh is grass. Vegetable food 
comes directly from the land ; animal food comes indirectly from the land, 
all animals being fed on the land. So the stuff of which we make our cloth- 
ing, our houses, our fuel, our tools, arms, ships, engines, toys, ornaments, 
is all got from the land. For the land yields timber, metals, vegetables, and 
the food on which feed the animals from which we get feathers, fur, meat, 
milk, leather, ivory, bone, glue, and many other things." 

2 Naturally enough, this surplus value of land is most striking in new 
countries, such as the United States, because in these countries the forces to 



592 PRINCIPLES OF POLITICAL ECONOMY 

There are but two factors capable of arresting the increase 
of rent or causing it actually to decrease. 

The first is the competition of new lands, which may take 
place as the result of colonization on a large scale or great 
improvements in the means of transportation. This factor 
is now operating with extraordinary intensity. 1 But it 
must, nevertheless, be regarded as a mere accident in eco- 
nomic evolution, — as a temporary disturbing element. In 
the second half of the nineteenth century so much new and 
unoccupied land was brought under cultivation that the 
supply of agricultural products exceeded the consumptive 
power of the population. But this state of affairs cannot 
long continue, and when the new countries will be more 
thickly populated, the law of increasing land-rent, for a time 
suspended in its operation, will again go into force. 

The second factor that may counteract the rising tendency 
of rent is a great and sudden improvement in the methods of 
farming. This is the most paradoxical as well as a most 
certain consequence of Ricardo's theory. Without accept- 
ing Ricardo's assumption that improved methods would lead 
to the abandonment of the least productive farms, we can 
readily see that all progress in agriculture, by increasing 

which we have referred are most intense. Many of the fabulous fortunes of 
American millionnaires are largely due to the unearned increment from land. 

In older countries where these forces are less pronounced and the increase 
of population is less rapid, the surplus value of the land is less noticeable ; 
yet in the past it has played an important part. 

In 1800, the rent of land in England was calculated to be $100,000,000, 
and in 1880, $300,000,000. During the same period, the population of Eng- 
land likewise had increased to three times what it was in 1800. But the 
rent (especially of agricultural land) has certainly fallen considerably since 
1880, despite the continued growth of the English population. 

1 Ricardo's theory is by no means overthrown by this fact, but confirmed 
by it ; for he declares expressly that there will be no rent in colonies or new 
countries. The competition of new countries and of colonies is precisely 
what has caused a temporary pause in the rise of rents in old countries. 

It should be noted, however, that although colonization and better means 
of transportation make rent decline in old countries, they make it increase 
rapidly in new countries. 



THE LEGITIMACY OF RENT 593 

the supply of farm products, must decrease the final utility 
and value of these products, and therefore lower the value of 
the land itself. 

It should be noted that neither the one nor the other of 
these two possible causes of a decline in rent would affect 
building lots. This is why the value of these lots has 
increased so astoundingly, and this, too, is why no category 
of private expenditure has increased more rapidly than that 
for the rent of buildings. 1 

III. The Legitimacy of the Rent of Land 

If we accept the theory that has just been explained, it 
follows : (a) that land-rent is the result of a kind of mo- 
nopoly ; (5) that this income is bound to increase in con- 
sequence of social forces entirely beyond the influence of the 
landlord. 

It must be admitted that these circumstances do not speak 
in favor of the legitimacy of land-rent. Yet if the legitimacy 
of private property in land is firmly established, that of land- 
rent would necessarily follow, just as the legitimacy of 
interest is inseparable from that of private property in 
capital. 

But if we turn from land-rent to property in land, and 
examine the legitimacy of the latter, the problem is no nearer 
a satisfactory solution. Not only does land present the three 
characteristics sui generis which we enumerated in the last 
section, and which alone would suffice to make the justice of 
property in land questionable, but, above all, it possesses 
the unique characteristic of not being a product of labor. All 
goods are the product of labor, except land. 2 Hence if we 
accept the theory that the basis of property is labor, we must 

1 In 1895 a small building lot on Lombard Street in London sold for $600 
per square foot. 

2 It may be objected that a diamond is not the product of labor. This 
would be false, for a diamond has no value unless it is found and taken out 
of the ground. 



594 PRINCIPLES OF POLITICAL ECONOMY 

conclude that all things may properly come under private 
ownership, except land. 1 

The simplicity and logic of this distinction strongly im- 
press the mind. It is of ancient date, for we shall presently 
see that it can be traced to the very beginnings of property. 
It is also a modern idea, for in our own times it has met 
with the approval, not only of socialists, but also of a number 
of contemporary economists and philosophers. 

The optimistic school, however, absolutely denies this dis- 
tinction, and asserts that land is just as much a product of 
the farmer's labor as the clay vase fashioned by the potter 
is the product of the potter's labor. Man, to be sure, has 
not made the land; but neither has he made the clay. 
Labor, in fact, never creates anything ; it simply modifies 
the materials that nature provides. Now this modifying 
influence of labor is no less real or effectual when applied 

1 Some persons have endeavored to justify the private ownership and rent 
of land by the following childish argument : Property in land is legitimate 
because all land has been bought, i.e. exchanged for money, and therefore 
the rent of land is simply the interest on the money thus invested. 

This argument entirely misses the question. A piece of land does not 
yield a rent of $4000 because it was bought for $100,000 ; but it sells for 
$100,000 because it will yield $4000 rent independently of any labor on the 
part of the owner. What we want to know is why and how the land does 
this ! The above argument is precisely like attempting to silence those who 
criticise the monopoly of money-changers in Prance, by saying that their 
right to this position is legitimate and unquestionable because the present 
incumbents paid for it. 

The only valid conclusion that we can draw from this argument is that 
the landowner (like the holder of any privilege bought with money) has a 
right if the land is taken from him to the repayment of the price paid. But 
this is an entirely different question. 

Nor has prescription (the acquisition of property by immemorial or long- 
continued and uninterrupted possession), often urged as justifying private 
property in land, any better validity. In some particular cases, and in order 
to avoid lawsuits impossible to decide, jurists have determined that long 
possession properly leads to the presumption that the title to land has been 
lost and may take the place of a legal title. But it would be absurd to make 
this proposition general and to declare that landed property in general is 
based on the presumption of legal titles that cannot be shown. 



LAND AND LABOR 595 

to the soil itself than when applied to the materials drawn 
from the earth's bosom. The optimists refer us, moreover, 
to such patches of land as those which peasants of the Valais 
or the Pyrenees have literally constructed on the sides of 
the mountains by carrying all the earth for that purpose 
in baskets upon their backs. An ancient author tells us how 
a peasant, accused of sorcery because of the abundant crops 
that he obtained from his land, while the neighboring tracts 
were perfectly barren, was called to appear before the Roman 
magistrate, and there, showing his two arms as the only de- 
fence he had to offer, exclaimed, "These are my sole magic." 
Landed property, to defend itself against the attacks now 
made upon it, need only give the same proud answer. 

And even if the land were not a direct product of labor, 
it is (says the optimistic school) at least the product of 
capital. The value of land and its growing surplus value 
are sufficiently explained by the improvements made in the 
land and the expenditure incurred by its owners. It is even 
said that if we kept account of all the expenditure incurred 
by the successive owners of the land, we should reach the 
conclusion that no land is now worth what it has cost. 1 

Despite the element of truth which this argument con- 
tains, it does not seem to us conclusive. No doubt man 
and land have ever been bound together by the tie of daily 
labor, often labor of the severest kind. The biblical prophecy, 
" In the sweat of thy face shalt thou eat bread," applied to 
agricultural labor ; indeed, the word labor itself originally re- 
ferred to tilling the soil, and the modern French " labourer " 
has the same meaning. But although land is the instrument 
of labor, it is not the product of labor. It existed before any 
human labor. 2 There can be no doubt that man, by labor 

1 The historian Michelet declared that "man has the best of claims to the 
land, — that of having made it." The physiocrats also based the right of 
property on the expenditures made to create the farm, and called them 
" advances on the land." 

2 The school of Bastiat, in order to prove that the value of land is due 
solely to labor, emphasizes the fact that where land is uncultivated, as in 



596 PRINCIPLES OF POLITICAL ECONOMY 

and expenditure, improves and modifies this marvellous in- 
strument of production which nature has provided. In 
other words, he adapts it better to his purposes ; and in this 
case he evidently confers upon it additional utility and in- 
creased value. We must, moreover, recognize that with 
every advance in the methods of agriculture, the land tends 
to become more and more a product of labor. For example, 
in many European countries vegetable gardening is carried 
on in large marshy tracts, covered with artificial substances 
that are prepared entirely by the gardener ; the value of 
such tracts is manifestly due largely to labor. But it is 
always possible, theoretically if not practically, to discover 
the value of the original soil itself under the successive 
additions of capital and labor. 

This original value is most easily perceptible in the forest 
that has not yet been cleared, and the prairie that is still 
uncultivated, but that may be sold or rented at a high price. 
It is plainly visible in the tracts of sandy shore in the 
French departments of Gard and Herault which have never 

certain parts of America, it possesses no value. This fact is true enough, 
but the argument based on it does not prove anything. Land situated on 
the banks of the Amazon is valueless, not because it is uncultivated, but 
simply because it is situated in a wild and uninhabited section where there 
are no men to utilize things, and where the very idea of wealth cannot 
arise. 

It is obvious that no land had any value before the first human being 
appeared upon its surface, and that it will cease to possess any value when 
the human race has disappeared. (See pages 46 ff.) But the virginity of 
the land proves nothing in this respect. If we were able, by some magic 
process, to transport these wild Brazilian tracts to the shores of the Hudson 
or the Delaware just as they are, they would be worth as much as the oldest 
farms in New York or Pennsylvania, although the latter have been worked 
and tilled and cared for by the labor of many generations. Lest the above 
supposition be found too fantastic, let us suppose a farm anywhere in the 
country to be surrounded by a wall and entirely abandoned for a hundred 
years, until every trace of human labor upon it had entirely disappeared. 
Would any one dare say that in this condition the land would lose all its 
value, and that no tenant or purchaser could be found for it? It is extremely 
likely, on the contrary, that even though it were left in this state it would 
be worth much more in a hundred years than now. 



LAND AND LABOR 597 

been tilled by man, but which nevertheless made the 
fortunes of their lucky possessors when it was accident- 
ally discovered that grape-vines planted there are not subject 
to the phylloxera. It is equally plain in the case of building 
lots in large cities, — lots over which no plough has ever 
passed, yet which have a much higher value than the most 
carefully cultivated farm. 

Even in the case of cultivated land, the natural value of 
the soil is evidenced by the unequal fertility of different 
farms. How often it happens that although two plots of 
land have been subject to equal labor and expenditure, one 
may yield large returns every year, while the other scarcely 
yields enough to cover expenses. 

The argument that no land is worth what it has cost is 
mathematically false, as we shall explain presently. This 
argument, moreover, does not apply to land for building pur- 
poses, because this land is always uncultivated. 

It is certain that if we add the value of all the labor and 
capital expended on a given piece of ground in one of our 
Eastern states, beginning with the colonial settler who first 
cleared it, we shall get a total far in excess of the present 
value of the land. But for our calculation to be complete 
and correct, it would be necessary also to add all the receipts 
from the land, beginning with the same date. If we do 
this, there is no doubt that the balance of such corrected 
and completed accounts will show that the land has yielded 
a constantly increasing revenue. 

If, then, private property in land seems so hard to defend 
from the standpoint of abstract justice, why has it existed 
since time immemorial, and why has it been maintained by 
the laws of almost all civilized peoples? Simply because it 
is based upon public utility, — which, indeed, is a sufficiently 
firm basis. 1 Its origin is due to historical forces which we 

1 The important distinction between landed property and other kinds of 
property is clearly indicated by the Servian Code of Laws in the following 
clauses : — 



598 PRINCIPLES OF POLITICAL ECONOMY 

shall discuss in the following section. These forces gradu- 
ally did away with primitive communism, and ultimately 
brought land under the scope of free and individual property, 
thus making it more nearly like property in movable com- 
modities. They gave rise, with the progress of agriculture 
and the development of civilization, to the gradual trans- 
formation of property and land. These forces were as 
follows : — 

(1) The growth of population compelled mankind to 
practise more " intensive " farming, in order to produce an 
increasing food-supply. 

(2) To stimulate labor it was considered necessary to 
give the cultivator not only a right to the products of the 
land, but also to the land itself as the instrument of his 
labor. This right was at first temporary ; but the period of 
its duration was made longer and longer, as the progress of 
agriculture required labors of longer duration. Finally, the 
right of property in land was made perpetual. 1 

Have these considerations, which originally gave rise to 
private property in land, now lost their validity as a means 

"The right of property in products and movable objects acquired by 
human exertion is based on the laws of nature." 

" The right of property in immovable objects and in the soil, whether culti- 
vated or uncultivated, is confirmed by the constitution of the country and 
due to civil laws." 

But some economists are unwilling to admit any distinction between what 
is absolutely just and what is socially desirable and convenient. Hence some 
of them continue trying to justify private property in land by basing it on 
labor, while others (such as Mr. L6on Walras) give up all attempt to defend 
it, and advocate the transformation of the individual ownership of land into 
social property. (See the section on the Nationalization of Land.) 

1 The right to the fruits of the earth carries with it a right to the earth it- 
self, at least for a certain period. The man who has sown the seed must be 
given time to reap the harvest. The planter of vines must wait six or seven 
years for his first vintage ; half a century must elapse before the acorn 
becomes a full-grown oak. Moreover, even annual crops, if the methods of 
farming are at all advanced, require certain labors (such as manuring, 
improvements of the soil, drainage, and irrigation), which will not pay for 
themselves in less than ten, twenty, or even fifty years. The man who has 



PRIVATE PROPERTY IN LAND 599 

of defence against the attacks of its adversaries ? We think 
not. 

With a more or less rapid but nevertheless constant in- 
crease of population, it is always important to choose that 
method of cultivating the soil and that system of ownership 

carried on these labors must be given a chance to recoup himself ; otherwise 
he would never have undertaken them. 

Yet if property in land be based only on reasons of social utility, the pres- 
ent system has overshot the mark in two respects : — 

(1) It would have been sufficient to confine the right of property to the 
land to which labor has really been applied. This principle, curiously enough, 
underlies the laws of the Mohammedans regarding property in land, which 
are more in conformity with the principles of economics than ours. The 
Mohammedan law confines private property to such land as has been made 
the object of actual labor, — land that has been irrigated, or drained, or 
built upon, or planted upon, or tilled, or cleared, or levelled. This land 
is designated as living land, in contradistinction to uncultivated or dead 
land, which remains collective property. " When a man has put life into 
dead land," says the prophet, "it shall belong to him, and he shall have an 
exclusive right to it." The application of this principle accounts for the fact 
that collective property in Algeria and Java, for example, still occupies an 
important place. 

Two-fifths of the area of France (54,000,000 acres) is in a " state of nature," 
but less than one-third of this land (15,000,000 acres) still belongs to the nation 
or the communes. All the rest has been brought under private property, on 
the basis of no other title than occupation. 

(2) We may well ask if it was really necessary to make the right of private 
property perpetual ? This characteristic far surpasses the exigencies of cul- 
tivation. Man, whose lifetime is but a brief span, does not require all eternity 
for the accomplishment of even the greatest enterprises. The franchises of 
railroad and canal companies are granted only for terms of ninety-nine years, 
as a rule. In England, moreover, the laws are such that the possession of 
most of the land and buildings is limited to a period of ninety-nine years. 

Rigorous logic, however, would appear to justify the conclusion that the 
right of property should last as long as the object to which it applies. And 
the object in question is perpetual. The earth, in fact, is the only wealth 
which possesses this quality. Time, the destroyer of all things, — tempus 
edax rerum, — has no effect on the land except to give it a new youth with 
each returning spring. This argument, however, is a specious one. What 
lasts forever is the productive power of natural forces, not the transforma- 
tions effected by labor, even though they be incorporated with the soil. In 
other words, that which gives most value to the land, — labor, advantageous 
location, etc., — does not constitute an everlasting part of it. 



600 PRINCIPLES OF POLITICAL ECONOMY 

which, for a given area, will provide food for the largest 
possible number of persons. 1 We believe that in strict 
justice society as a whole should own all the land. But 
society cannot better promote the interests of all than by 
delegating this right to those who can make the best use of 
the land. 2 Thus far, individual owners have succeeded in 
doing this, and, until proof to the contrary is forthcoming, 
we are justified in thinking that they are the persons to 
whom this social function may most safely be intrusted. 3 

IV. The Evolution of Property in Land 

Not only is private property in land sanctioned by all 
modern systems of legislation, but it is regarded as 
the very type of private property. When we speak of a 
man's property, without using any qualifying term, we 
are generally understood to mean landed property or real 
estate. 

Yet we may regard it as certain, in spite of numerous con- 
troversies which have recently been waged on this subject, 
that property in land is an institution of relatively recent 

1 In Canada it has been observed that the indigenous races which live by- 
hunting require the enormous area of fifteen square miles per person in order 
to obtain sufficient food. Below this limit, famine decreases their numbers. 
But the system of agriculture practised in Western Europe enables the same 
area to support more than four thousand persons. 

2 After having wavered somewhat, this is the conclusion which Herbert 
Spencer reached in his book on Justice. " While I adhere to the inference 
originally drawn, that the aggregate of men forming the community are the 
supreme owners of the land — an inference harmonizing with legal doctrine 
and daily acted upon in legislation — a fuller consideration of the matter has 
led me to the conclusion that individual ownership, subject to state-suzer- 
ainty should be maintained." 

3 Collectivists assure us that the collective cultivation of the soil would 
produce far better results than those obtained by individual ownership, be- 
cause it alone would permit the employment of large-scale methods of produc- 
tion and procure the advantages that ensue therefrom. In this connection, 
the reader should refer to what has been said of large-scale and small-scale 
agriculture on page 170. 



THE EVOLUTION OF LANDED PROPERTY 601 

date, and that its establishment was even a matter of great 
difficulty. 1 

We may distinguish, in the evolution of landed property, 
six successive stages which we shall describe briefly. 2 

(1) It is obvious that landed property cannot arise among 
peoples that live by hunting, or among pastoral races lead- 
ing a nomadic life. It can arise only with the beginnings of 
agriculture. And even in the early phases of agricultural 
life, landed property is not yet instituted. This is due to 
two circumstances. First, because the land is superabundant 
and no one feels the need of marking off his share. Secondly, 
because agricultural methods are still in a primitive state; 
the farmer leaves one field as soon as it is exhausted, and 
takes another. The land is cultivated in common, or at 
least without any effort to attribute separate, well-defined 
parts of it to particular individuals. It belongs to society 
as a whole, or rather to the tribe. Only the product of the 
soil belongs to the man or family cultivating it. 3 

(2) Gradually the population becomes more sedentary 

1 The establishment of absolute private property in land is perhaps the 
most characteristic feature of Roman law ; and yet, even in the early history 
of Rome, it seems beyond question that individual property applied only to 
the home and to a narrowly limited area surrounding it. 

Among the authors who consider that property was collective at the 
beginning, we may refer to : De Laveleye, "Primitive Property " ; Sir Henry 
Maine, "Ancient Law"; Paul Lafargue, "The Evolution of Property." 
The opposite position is upheld by Fustel de Coulanges, " Origin of Property 
in Land " ; Guiraud, " La propriCte" fonciere en Grece." 

2 The order here given is logical rather than chronological. We must not 
be understood to mean that in all countries property has gone through each 
of these stages in precisely the order given. The dominium ex jure quiritium, 
for instance, — a form of free and absolute property, — preceded feudal prop- 
erty in point of time, although logically it was a superior form. 

3 Arva per annos mutant (they change their land annually) is a famous 
phrase used by Tacitus in speaking of the old Germans. The meaning of 
this phrase has recently been contested, and a new and somewhat paradoxical 
translation proposed, viz. "They change their rotation of crops yearly." 
The system of tribal ownership of land is still found in several countries, e.g. 
the arch of the indigenous tribes of Algeria. 



602 PRINCIPLES OF POLITICAL ECONOMY 

and more closely attached to the land. It also becomes denser, 
and is forced to adopt more productive methods of agricul- 
ture. Thus the first stage is succeeded by a second, viz. 
that of temporary possession together with periodical divi- 
sions. Though the land is still regarded as belonging to 
society, it is divided equally among all the heads of families. 
This division, moreover, is temporary, not permanent. First 
of all, it is only for a period of one year, this space of time 
being sufficient for the ordinary cycle of agricultural opera- 
tions. Then, as methods of husbandry improve and culti- 
vators require a longer time for the accomplishment and 
fruition of their labors, the partition of the land is gradually 
allowed to last for much longer periods. This system of a 
periodical division of the land still exists in Russia, and 
is known as the mir ; it is even found in several Swiss can- 
tons under the name of allmend. The community as a 
whole (i.e. the population of each village), owns the land 
and distributes it among its members by a periodical division, 
the frequency of which varies from one commune to another. 1 
(3) There comes a time when these periodical divisions 
fall into disuse. Skilful farmers who have improved the 
land do not willingly submit to an arrangement which at 
certain intervals deprives them, to the profit of the community, 
of the increase of value due to their labor. Thus arises 

1 The territory of the commune is divided into three classes. The first 
includes the land upon which buildings have been erected, together with the 
gardens around them. This property is hereditary ; it may be sold, and is 
not subject to division. The second includes the arable land, which is divided 
at certain intervals into portions as equal as possible, according to the num- 
ber of inhabitants. The third consists of meadow-land and forests, and 
generally remains undivided both with regard to use and to ownership. The 
mir, an assembly consisting of the heads of the families, has sovereign power 
in the distribution of shares and the system of cultivation. (For further 
details consult Kovalewsky, " Le Regime Economique cle la Russie.) It is a 
matter of controversy among Russian economists whether this institution is 
only a survival, bound soon to disappear (as it has already disappeared in 
the rest of Europe), or, on the contrary, the precursor of a future form of 
property. 



THE CONQUEST OF LAND 603 

the institution of family proprietorship, each family hence- 
forward being regarded as the permanent owner of its share 
of land. Yet this is not individual property, for the right 
of disposal does not exist. The head of the family can neither 
sell the land, nor give it away, nor bequeath it after his 
death ; for it is regarded as a collective patrimony and not 
as individual property. This system can now be studied in 
the family communities of Eastern Europe, especially the 
Zadrugas of Bulgaria and Croatia, which consist of between 
fifty and sixty persons ; they are now rapidly disappearing 
because of the spirit of independence manifested by the 
younger members of the family. 

(4) The evolution of landed property passes also through 
a stage which, though accidental, has never been wanting in 
the history of human societies. I refer to conquest. There 
is probably not a single territory anywhere on the surface of 
the earth that has not been taken by force at some time or 
other from the people that occupied it, and been appropria- 
ted by the conquering race. 1 The victors, however, in virtue 
of their position as conquerors and masters did not care to 
cultivate the land, but merely assumed the legal ownership 
and " overlordship," leaving the subjected people practically 
in possession of the soil. Land tenure was more or less akin 
to actual ownership, but always limited by the terms of an 
agreement between lord and vassal ; " obligations " were im- 
posed upon the latter ; dues and services were exacted from 
him by the lord ; and he could not alienate the land or 
leave it without the lord's permission. 2 For several centuries 

1 As a proof of the influence which conquest has had upon the evolution of 
landed property, Herbert Spencer makes the interesting observation that the 
regions in which the old forms of collective property have been best preserved 
are precisely those poor and mountainous localities whose situation has ena- 
bled them to escape conquest. 

2 Accounts of the system of land-holding under feudalism, the very basis 
of which was a peculiar system of land-tenure, may be found in the following 
publications: A. R. Wallace, "Land Nationalization"; S. W. Thackeray, 
"The Land and the Community" ; the article on "Land" in Bliss' Ency- 



60tt PRINCIPLES OF POLITICAL ECONOMY 

this system, known as feudalism, was the foundation of the 
social and political constitution of Europe. There are still 
traces of it in many countries. Especially in England, almost 
all landed property is still, in the eyes of the law, held by 
a limited tenure, and is hedged about by a multitude of re- 
strictions very difficult to remove. 1 

(5) The growth of individualism and of equality before 
the law, together with the abolition of the feudal system, 
particularly in those countries which felt the influence of the 
French Revolution of 1789, led to a fifth stage which marks 
our own epoch. This is characterized by the final establish- 
ment of free property in land, with all its attributes. Never- 
theless, property in land is not entirely on the same footing 
as personal or movable property. There are numerous points 
of difference, familiar to lawyers ; but the essential difference 
consists of additional difficulties connected with the trans- 
fer of property in land, or so-called realty. 2, 

clopedia of Social Beform ; Cunningham, " Growth of English Industry and 
Commerce," Vol. I; Emerton, "Mediaeval Europe." 

1 "Thus was established, in our English law, the cardinal maxim with re- 
gard to the possession of lands, viz. , that the king is the sole master and the 
original owner of all the land in the kingdom." (Consult Blackstone's 
' ' Commentaries. ' ' ) 

2 By the English statute of frauds, reenacted by the great majority of our 
state legislatures, a conveyance of an estate or interest in land (except leases 
for three years or less) is required to be in writing and signed by the party 
undertaking the same. As a general rule this conveyance must also be "under 
seal," although such seal in some of our states may be a mere nourish of the 
pen. 

Again, a wife must join with her husband in signing or acknowledging a 
deed or mortgage of land, in order that the title may be perfect. 

Other instances of the formalities and difficulties trammelling the transfer 
of land in this country are these : — 

As soon as the grantee of real estate obtains a deed or mortgage of it, he 
must have it recorded by a public official, — generally the county clerk or 
register of deeds. In order to entitle it to record, the conveyance must be 
acknowledged by the grantor before a proper office*, — a notary public, a 
commissioner of deeds, or the like. Upon the sale of real estate it is custom- 
ary for the vendor to furnish an " abstract of title " or " search," showing the 
true condition of the title. * 



TRANSFERABILITY OF LAND 605 

(6) But one more step must be taken in order that landed 
property shall be precisely like personal property. This step 
consists in making property in land perfectly mobile or trans- 
ferable, i.e. making it possible for any person not only to 
call the land his own, but to dispose of it as simply and as 
easily as of any other object of value. This final step has 
been accomplished in a new country, Australia, by the cele- 
brated Torrens system, 1 which enables the owner of real 
estate to put his land, so to speak, into his pocket-book in 
the form of a piece of paper, and to transfer it to some 
one else as easily as if it were a bank note, or at least 
a bill of exchange. Efforts have recently been made to 
introduce this system in the old countries of Europe, and 
it is probable that the logic of facts and the natural laws 
of social evolution outlined above will lead to its ultimate 
acceptance everywhere. 

The inference that may be drawn from this rapid review 
is that property in land has gradually and steadily departed 
from its original collective form and become increasingly indi- 
vidualistic, thus approaching more and more closely the state 
of affairs in which private property in land is practically 

1 This system, named after the man who caused its adoption in New 
South Wales about fifty years ago, consists essentially of the following 
features : — 

(1) There is a register in which each plot of ground has its own page, giving 
a plan and description of it and containing, as it were, a history of the land 
since the time when it became private property. 

(2) There is a title-deed, which is a facsimile sometimes even a photo- 
graphic reproduction, of the corresponding leaf in the register. When this 
has been handed over to the owner, it absolutely represents the land itself and 
may be sold, given for security, etc. 

The purpose of this system, as Torrens himself declared, is to rid landed 
property of all the barriers that prevented free access to it, "like the port- 
cullis, drawbridge and moats which prevented access to the castles of our 
ancestors." This system, adopted in turn by all the Australasian colonies, as 
well as in some other English colonies and in Tunis, is under consideration 
in several countries. Several legislative attempts have been made to introduce 
it in England. It was adopted in Illinois a number of years ago, but soon 
declared unconstitutional by the Supreme Court of that state. 



606 



PRINCIPLES OF POLITICAL ECONOMY 



indistinguishable from private property in personal goods 
and capital. 1 

V. The Hire of Land 

In the United States, agriculture has been carried on 
chiefly by the proprietors themselves, not by agricultural 
tenants. There are millions of farms just large enough to 
employ profitably the labor of the proprietor and his family. 2 
The good effects of the system of private land tenure are 
most conspicuously seen, when, as is here the case, the owner 
and the occupier of the land are one and the same person. 
" Under these conditions, land ownership serves at once as a 
motive to zeal in labor and to liberality in investment. 
When one man owns the land and another occupies it, the 
right of the owner to the benefit of all improvements not 

1 This tendency furnishes presumptive evidence against a future collec- 
tivistic organization of society. Yet it is not conclusive evidence, for we 
have already pointed out several cases of regressive evolution. 

2 The following census statistics show the character of our agricultural 
tenures. 






Yeae 


Cultivated by Owner 


Eented foe 


Money 


Eented foe 


Shaees 


Total 


Per cent 


Total 


Per cent 


Total 


Per cent 


1900 
1890 
1880 


3,712,408 
3,269,728 
2,984,306 


64.7 
71.6 
74.5 


751,665 
454,659 
322,357 


13.1 

10.0 
8.0 


1,273,299 
840,254 
702,244 


22.2 
18.4 
17.5 



The figures for 1880 and 1890 do not include farms with an area of less 
than 3 acres which reported the sale of less than $500 worth of products in 
the census year. On the other hand, many farms were counted twice in 
those years whenever they were tilled in part by the owner, and rented in part. 

Although the relative number of farms cultivated by owners has decreased 
since 1880, the census authorities call attention to the fact that the farms 
operated by owners have increased faster since 1850 than the agricultural 
population. Such an increase can only be possible providing the increase in 
the number of tenants has been by the elevation of former wage employees to 
the position of farm tenants. (See Twelfth Census, Vol. V, pages xliii and 
lxxvii. ) 



THE RENT CONTRACT 607 

infrequently acts as a discouragement to the occupier and 
prevents him from laboring with the zeal or the skill which 
he would otherwise use." 1 

In England, the land is usually owned by some rich man 
who possesses large estates, but does not care to engage in 
the active business of farming. The farmer hires the land 
and its improvements from the proprietor, and stocks it with 
cattle, carts, improved implements of all kinds, and then 
employs day -laborers to do the manual work, laboring him- 
self in superintendence, in keeping accounts, buying and 
selling, etc. The laborer, generally speaking, is nothing but 
a laborer, and the tenant-farmer is his employer. 2 

Rent, by which we now mean the income which the pro- 
prietor of a farm receives for letting it to an entrepre- 
neur, closely resembles the income from labor (called 
wages), and the income from capital (called interest). Like 
wages and interest, rent is agreed upon by contract in ad- 
vance of the business enterprise in which land, labor, or 
capital are to be engaged ; in consideration of a regular 
money annuity, 3 the landlord abandons all claim to the prod- 
ucts of the farm. But although there is a close legal 
resemblance, there is in reality a great difference. For in 
the contract between the laborer and the entrepreneur or em- 

1 Hadley, " Economics," page 130. When the farms cultivated by owners 
are very small, the methods of farming are likely to be primitive, capital is 
likely to be insufficient, and a few bad seasons may lead to distress and ruin. 
The disadvantages under which so-called peasant proprietors suffer are 
briefly indicated in Jevons, "Primer of Political Economy," page 89. 

2 Jevons, "Primer of Political Economy." 

3 It must be noted, however, that just as the wage system has been 
amended by what is known as profit-sharing, and the payment of interest 
transformed into the payment of dividends, so also the system of tenantry 
or leasing land to others is sometimes supplanted by the metayer system, 
which plays an important part in France, Italy, and several other countries. 
This system, whereby the cultivator gives a share of the product to the pro- 
prietor, who generally furnishes the stock and improvements, also prevails to 
a large extent in the south of the United States. (See the statistics regard- 
ing share tenantry on page 606, note 2.) 



608 PRINCIPLES OF POLITICAL ECONOMY 

ployer, the latter occupies the predominant situation, whereas 
in the contract between the landowner and the entrepreneur 
known as the tenant, the former undoubtedly has the advan- 
tage. History furnishes few instances of employers exploited 
by their laborers ; but it offers innumerable examples of 
tenants robbed by their landlords. While legislative bodies 
sometimes feel called upon, on the one hand, to establish 
a minimum rate of wages (as in Belgium), they are also 
obliged, on the other hand, to fix a maximum rental (as in 
Ireland). k 

We have already said that the price actually paid for the 
use of a farm does not necessarily coincide with economic 
rent, which is distinct and separate from wages and in- 
terest, and due solely to forces that are independent of the 
landlord's conduct. The price paid for the hire of a farm 
(for which the French vocabulary has a distinct term, 
fermage), is usually greater than the land-rent. There 
are usually buildings, roads, fences, drains, and other im- 
provements, of which the landlord is also the owner; in 
respect of these, he is a capitalist, and the return he receives 
is interest. Again, the pressure of necessity may oblige 
the tenant to pay the landlord not only the surplus that is 
due to natural and social forces, but, in addition to this, a 
part of the reward of his own labor. Yet it may happen, 
contrariwise, when tenants are not numerous but in great 
demand, that the price for hiring farms will be less than the 
land-rent ; in which case the tenant retains for himself a 
part of the proceeds due to the natural advantages of the 
land. 

The price which the tenant pays for the use of a farm is 
governed by the same laws as the rate of wages or of interest, 
i.e. by the laws of supply and demand. In new countries, 
where land is abundant, and where everybody can find 
vacant land upon which to settle as landlord, tenants usually 
will not consent to pay more for hiring a farm than the 
interest on the capital that has been put into it. Wherever, 



THE TENANT SYSTEM 609 

on the other hand, the population is very dense, the land 
entirely occupied, and the wealth of the nation entirely agri- 
cultural — as in Algeria or Ireland — the high rent may leave 
the tenant barely enough to support life. 1 

The system of tenantry and the income due to it, although 
sanctioned by venerable custom, must be regarded as incom- 
patible with the best interests of society, for reasons quite 

1 In Algeria, the tenants called Jchammes retain only one-fifth of the harvest. 
It is well known that in Ireland the rent of farms has increased to such an 
extent that part of the population has died of hunger, another part of it 
has been obliged to emigrate, while those who remain are in permanent 
insurrection. Since 1881 a series of land laws have been promulgated for 
the sole purpose of introducing more humane conditions among tenants. 
The remarkable law of 1903, which will probably mark an epoch in the his- 
tory of the country, provides that the British government shall assist Irish 
tenants to purchase their land upon equitable terms. 

Where the system of tenantry prevails, as in England, a great deal de- 
pends, of course, on the nature of the agreement between the landowner 
and the farmer. Many English landlords refuse to let their land for long 
periods. They like to have farmers who are tenants at will, and can be 
turned off their farms at a year's notice, and deprived of the value of all 
improvements they have made, if they offend the great landowner. Tenants 
at will have no inducement to improve their farms, because this would tempt 
the landowner to turn them out or to raise the rent. " There are two modes 
of remedying the unfortunate state of land tenure in this country," says 
Professor Jevons, speaking of Great Britain, "namely, (1) By a system of 
long leases;. (2) By tenant right." 

"A lease is a formal agreement to let land or houses to a tenant for a 
certain number of years, at a fixed rent and with various conditions which 
are carefully stated to prevent misunderstanding. When land is taken by 
a farmer under a lease for thirty years or more, it becomes almost like his 
own property, because, in the earlier part of his term, he can make great 
improvements, and yet be sure of getting the value back before the lease 
comes to an end. In the eastern parts of England and Scotland, where the 
farms are largest and best managed, these long leases are the usual mode of 
letting land." 

"Another good arrangement is tenant right, which consists in giving the 
tenant a right to claim the value of any unexhausted improvements which he 
may have made in his farm, if he be turned out of it." 

Modern society often so far modifies the principle of private property in 
land as to introduce judicial rents instead of competitive ones ; that is to say, 
the rent is determined by public arbitration between landlord and tenant. 



610 PRINCIPLES OF POLITICAL ECONOMY 

different from those which led us to antagonize the wage 
system. We believe that tenancy is bound to make way for 
direct cultivation by the owners themselves, either separately 
or, better still, through partnership or cooperation. 

Our first objection to the tenant system is that it under- 
mines private property in land by destroying the validity 
of the principal argument in favor of that institution. We 
have pointed out that private property in land does not 
owe its existence to " natural " or " divine " law, but simply 
to the recognition that it is the most productive method 
of cultivating the soil, and the system most conform to 
the general interest. We have taken it for granted that 
no one can make better use of the land than the owner him- 
self. But this assumption loses all sense when the owner, 
by leasing his land to a tenant, shifts the work of culti- 
vation upon some one else and goes off to a large city or 
a foreign country to live on the income drawn from his 
estates. 

The landlord who, instead of cultivating the soil, uses it 
simply as an instrument of money-making and a means to 
live in idleness, is ill suited for the social mission assigned 
to him. It is difficult to conceive that the land has been 
distributed to certain men simply in order to furnish them 
with an income, fruges consumere nati, in the same way that 
kings formerly distributed benefices and prebends among 
their favorites. The very reasons which seemed sufficient 
to justify the right of property in land militate against the 
system of tenantry. 

A second complaint against the system is that the separa- 
tion of the roles of landowner and farmer, which results from 
the leasing of land, is disastrous to agriculture. To make 
the best and fullest use of the land, a man must love the 
soil and cling to it. But when the land is cultivated by 
tenants, this love of the soil is necessarily weakened, both in 
the landlord and the tenant. The former often lives far 
away from the land and sometimes knows nothing about it ; 



THE TENANT SYSTEM 611 

the latter merely hires it for a while and does not care what 
ultimately becomes of it. 1 

The arguments presented in favor of the tenant system 
are these : — 

(1) It is uncommon to find a landlord — unless he be 
an absentee — who has absolutely no interest in the land. 
The system of tenantry, moreover, constitutes a division of 
labor in perfect harmony with a satisfactory organization of 
production. " The landlord," says Professor Leroy-Beau- 
lieu, "stands for the future and perpetual interests of the 
farm, whereas the tenant considers its present and tempo- 
rary interests." 

But even supposing that the landlord always understands 
his part perfectly, it is possible that these present and future 
interests may conflict with each other ; hence it would be 
better that both interests be in care of the same person. 

(2) To forbid leasing land to tenants would compel many 
owners to sell their estates, and would thus exclude from 
land-holding a number of persons whose age, sex, or profes- 
sion, or whose obligatory absence or extensive possessions 
make it impossible for them to cultivate their estates them- 
selves. 

This may well be true; but this result constitutes an 
advantage rather than an evil. If these persons cannot 

1 In certain parts of France, whenever people remark upon the inferiority 
of crops on certain farms, it is not uncommon to hear the reply, "Oh, one 
can't expect anything better. That land is only hired land." 

The metayer system is not open to the objections stated above. The 
customary complaint against it is that it is a system of cultivation suited 
only for barbarous, comparatively uncivilized peoples, and compatible solely 
with poor and primitive methods of farming. But this depends on the 
method of agriculture and on the terms of the contract, which are very 
elastic. In Tuscany the metayer system has been found perfectly com- 
patible with advanced methods of cultivation. It possesses, over the system 
of tenantry, the following two advantages : — 

(1) It prevents the landlord from losing interest in the cultivation. 

(2) It never embarrasses the tenant with regard to paying rent, inasmuch 
as he pays in goods out of each harvest — when there is one. 



612 PRINCIPLES OF POLITICAL ECONOMY 

properly perform their function as landowners, let them 
cease to be landowners ! If we want to preserve private 
property in land, it must become an occupation, a profession, 
a function, and all economic and legal means must be em- 
ployed to attain a social condition of affairs in which the 
function of landowner shall fall only to the lot of those 
persons who are willing and competent' to perform it, i.e. to 
those who will themselves cultivate the land. 1 A function 
that is so important for the welfare of society must not be 
" leased " or delegated. 

In the United States the present favorable condition of 
affairs is largely due to the fact that millions of settlers have 
found homes on land obtained from the government by gift 
or at prices of from $1.25 to $2.50 per acre. Land may be 
secured through the General Land Office, either by direct 
purchase or under the homestead laws. 2 Hence, the public- 
land states of the Central West, built up by settlers upon 
land purchased or granted out of the " public domain," are 
composed for the most part of a large number of proprietors, 
not of separate classes of landlords and tenants. Under the 
homestead law, " any citizen of the United States, or any 
person who has declared his intention of becoming such, who 
is the head of a family, or has attained his majority, or has 

1 The above statement must not be interpreted as an acceptance of the 
formula : ' ' The land should belong to small proprietors. ' ' Small farming 
with scant capital is as undesirable as the tenantry system. Small proprietors 
are usually unprogressive. It is not necessary that the land be held only by 
those who guide the plough or wield the hoe. Large landowners frequently 
introduce better methods, which would never have been tried by small 
proprietors unless the former had proved them to be successful. 

2 Before 1820, the minimum price of land was $2 per acre; the price 
was then reduced to $1.25. Some lands may still be purchased at that rate, 
while others are held at $2.50 per acre. The public domain of the United 
States open to settlement comprised, on July 1, 1902, over five hundred mil- 
lion acres (excluding Alaska and our new insular possessions). These lands 
are partly situated in the Kocky Mountain and Pacific Coast states and terri- 
tories ; a large share are arid, and probably can never be brought under 
cultivation. 



LAND TENURE IN FRANCE 613 

served in the army or navy in time of war, and is not already 
the proprietor of more than 160 acres of land in any state 
or territory, is entitled to enter a quarter section (160 acres), 
or any less amount of unappropriated public land, and may 
acquire title thereto by establishing and maintaining resi- 
dence thereon, and improving and cultivating the land for 
a period of five years." 1 

In France, the law encourages cultivation by the owners 
themselves and facilitates the formation of small landed 
estates. 2 These laws, however, have injurious effects when 
they increase the limitations on the transfer of land belong- 
ing to minors, to married women, or to corporations. For in 
this case it becomes necessary to let the land to tenants, inas- 
much as the land is forcibly kept in the hands of persons 
who cannot cultivate it themselves. Thus, under the pretext 
of protecting the interests of certain individuals, the welfare 
of society is jeopardized. 

1 For the fiscal year ended June 30, 1902, the homestead entries amounted 
to 14,033,246 acres. The sales of public lands for the same period amounted 
to $5,880,088.65. 

The extent to which advantage has been taken of our land laws and home- 
stead laws by the people of the country accounts in no small measure for the 
facts indicated on page 606, note 2. The following figures from the census 
of 1900 are also interesting in this connection : — 

Families occupying encumbered farms of their own .... 1,094,573 
Families occupying unencumbered " " " " .... 2,422,678 

Total families occupying their own farms 3,517,251 

Families occupying hired farms 2,013,903 

Total families occupying farms . 5,531,154 

2 About one-third of the farms of France — 36 per cent — are under the 
regime of tenantry, 12 per cent under the metayer system, and 52 per cent 
cultivated by the owners themselves. This is a favorable state of affairs. 
There are few countries, except new ones and colonies, in which the 
system of tenantry occupies so small a place. In Great Britain, for ex- 
ample, the conditions of tenure are radically different, for there ten-elev- 
enths of the land (according to Mulhall) belong to one two-hundredths part 
of the population. 



614 PRINCIPLES OF POLITICAL ECONOMY 



VI. Plans for Nationalizing the Land 

The classical economists themselves grasped the nature 
and essential consequences of private property in land. 
They pointed out that it is a sort of monopoly, justified by 
present custom, but hardly defensible on grounds of social 
justice. Naturally, therefore, social reformers have long 
sought to bring actual conditions into better harmony with 
our ideals of justice. Not only full-fledged socialists, but 
economists and philosophers having little sympathy with 
socialism, and even liberals and individualists, have either 
condemned individual property in land, or at least admitted 
the desirability of some kind of social co-proprietorship as a 
corrective of its disadvantages. They have, in other words, 
suggested an extension of what is known as the government's 
"right of eminent domain," and proposed methods for re- 
forming, in the interests of society as a whole, the institution 
of property in land. 1 

The most important plans for reform may be summarized 
as follows : — 

(1) The perpetuity of property rights in land should be sup- 
pressed, and a system of leases substituted for it. The govern- 
ment should buy the land and lease it to individuals for culti- 

1 We cannot here discuss the agrarian socialism of antiquity, despite 
its importance, nor devote any space to an account of the rise of land 
nationalization schemes in the various countries of Europe. The names 
most closely associated with this movement are as follows : In Belgium, 
Colins and de Laveleye ; in Switzerland, L6on Walras and Charles SecrCtan ; 
in France, Kenouvier and Fouille'e ; in Germany, H. H. Gossen and M. 
Fliirscheim. 

In England, the theory of land nationalization goes back at least as far as 
Thomas Spence, who in 1775 advocated the " parochializing " of land "so 
that there shall be no more nor other landlords than the parishes." The 
most eminent of recent land nationalizes are A. R. Wallace, the naturalist, 
and a school of Christian socialists who teach categorically that private 
property in land is illegitimate. ("All the earth is mine," said the Lord.) 
Herbert Spencer, an extreme individualist, expressly condemned landed 
property in his earlier works, but subsequently changed his views somewhat. 



PURCHASING THE LAND 615 

i 

vation during periods of fifty, seventy, or even ninety-nine 
years, in much the same manner that it grants franchises to rail- 
road companies. When this time had elapsed, the government 
would again acquire possession of the land, just as the French 
government will acquire the ownership of French railroads 
in 1950. Then the government could lease the land for a 
new period, requiring the lessees to pay, either in a lump sum 
or in annual rent, the surplus value or unearned increment 
of the land. In this way the government or the " State," 
representing society as a whole, would receive all the un- 
earned increment, and collect an enormous revenue that 
would ultimately permit the abolition of all taxes. 

Although Leroy-Beaulieu asserts the contrary, such a 
system would not be incompatible with good husbandry ; 
the greatest undertakings of modern times — such as rail- 
roads, the Suez Canal, etc. — have been carried on under this 
system. Precautions should, of course, be taken to renew 
leases a sufficient time before they expire. It must be con- 
ceded that this arrangement would be more likely to promote 
good husbandry than the system (now prevailing in many 
countries) under which almost all the land is cultivated by 
poor tenants who may be sent away at the caprice of the 
landowner. 

But the execution of this project would at the very outset 
encounter an insurmountable obstacle, inasmuch as justice 
would require that the land be bought from its present owners 
at an equitable price ; and this would be absolutely ruinous. 
The present value of land in this country is probably more 
than thirty billion dollars, i.e. about fifteen times the total 
national debt of the United States. This amount would 
have to be borrowed to indemnify the landowners. 1 

1 A few years ago we suggested, as a practicable scheme, that the govern- 
ment purchase the lands by paying for them immediately, but not require 
their actual transfer until ninety-nine years afterward. Under these circum- 
stances, land could be bought at low prices ; for the proprietor would compare, 
on the one hand, the relinquishment of his property at a time so far distant 



616 PRINCIPLES OF POLITICAL ECONOMY 

(2) A second system, advocated by the elder and the younger 
Mill, and perhaps even by the Physiocrats, has acquired 
widespread celebrity since its advocacy by Henry George, 1 
an American, under the name of single tax system. It con- 
sists simply in levying an increasing tax on land values, the 
increase being so adjusted as to " absorb the whole economic 
rent, or what is sometimes styled the unearned increment of 
land values. " 2 Mr. George, who must not be called a social- 

that neither he nor even his grandchildren would suffer from it, and on the 
other hand, the sum of money that might be had immediately. Under these 
circumstances, he would hardly hesitate to accept a very low price. 

The amounts to be offered can be calculated by means of annuity tables : 
$1000 to be paid in a hundred years, i.e. in 2003, at the rate of 5 per cent 
would now be worth $7.98. Thus $30,000,000,000, —taking this to be the 
value of the land in the United States, — deliverable in 100 years, are 
theoretically worth about $240,000,000, paid now in cash. 

Professor Leroy-Beaulieu, while designating this system of purchase as 
"perhaps the most ingenious" of all that have been proposed, rejects it as 
impracticable. We will admit that a social reform for- which we must wait 
a hundred years is not worth much. The rate of capitalization, moreover, 
has changed since the above plan was proposed, and the whole calculation 
must be greatly modified. At the present customary interest-rate of 3 per 
cent, many more million dollars would have to be paid now as a mathe- 
matical equivalent of thirty billions payable one hundred years hence. 

1 George's book, "Progress and Poverty," finished in 1879, has been 
translated into several foreign languages and has arbused considerable com- 
ment in nearly all the nations of Western Europe. 

2 It is plain that the two "systems" summarized by Professor Gide 
resemble each other very closely. The difference between them lies mainly 
in the fact that Mr. George proposes to gradually " tax the rent," while the 
first system proposes gradually to " take the land." The first system is in no 
wise incompatible with the taxation of land values, but it lays most stress 
upon the actual acquisition of the land by public authorities. Mr. George's 
system would " tax the landlord out of existence," and is opposed to indemni- 
fication. The first system seems to coincide with that of the English " Land 
Nationalization Society," which proposes to pay for the land. The second 
system, on the other hand, appears identical with that of the English " Land 
Restoration League," now called the "League for the Taxation of Land 
Values." This league opposes every proposal for " land purchase " or "for 
creating a new class of landlords under the name. of peasant proprietors." 
It should be noted, however, that John Stuart Mill contemplated the full 
compensation of the existing body of landowners. 



THE SINGLE TAX 617 

ist, for he accepts the institution of private property, holds 
that the economic rent of land is due entirely to the growth 
of population, which increases the demand for products of 
the land, and raises rents ; he holds that a " single tax," — 
equal to the rental value of all land, apart from improve- 
ments, — would yield more than enough to support the gov- 
ernment and would make all other taxation unnecessary. 1 

The great practical objection to this plan is that there are 
usually two elements in the increased value of land : one arises 
from various social and impersonal causes ; but the other is 
due to the labor of the landowner, or at least to the capital 
that he has advanced. In establishing such a tax we should 
have to be careful not to touch this second element — not only 
for fear of violating the principles of equity, but also for fear 
of discouraging all spirit of enterprise and all progress in 
agriculture, which even now is too much subject to routine. 
The separation of these two elements, however, is practically 
impossible ; the landowner himself could not do it accurately, 
nor would a public officer be better able to do it. 

Note, moreover, that if society profits by all gains in the 
value of land, on the ground that they are due to no exertion 
or sacrifice on the part of the owner, it is in equity bound to 
make good all losses arising from the decreased value due 
to social causes over which he has no control, — and this for 
precisely the same reasons. 2 

Finally, we must raise the same objection as that urged 
against the first system. The confiscation of rent by taxa- 

1 Space does not permit a detailed examination here of the single tax sys- 
tem proposed by Mr. George. We refer the reader to " Progress and Pov- 
erty," and to the following literature: Bliss, " Encyclopedia of Social 
Reform" (articles on Land, Land Nationalization and Single Tax); Walker, 
"Political Economy" ; Bullock, "Political Economy" ; Bastable, "Public 
Finance"; Plehn, "Public Finance"; Ely, "Taxation"; Seligman, "Es- 
says in Taxation." These books contain a discussion of the economic, 
ethical, practical, and financial aspects of the scheme. 

2 As Francis Walker put it : " ' Heads I win, tails you lose,' is not a game 
at which the state can, in decency or fairness, play with its citizens." 



618 PRINCIPLES OF POLITICAL ECONOMY 

tion would have the same effect as the confiscation of the 
land itself. It would destroy the value of land as such and 
give rise to the necessity for paying an indemnity to the 
present holders, although Henry George expressly denies 
this. The ensuing financial difficulties would be much like 
those already pointed out. 1 

While it must be admitted that the unqualified ownership 
of land enables the land-holding class to reap an unearned 
benefit at the expense of the community, yet, for the reasons 
given above, we regard land nationalization as impracticable 
in so far as it concerns property already established. But 
our objections are not entirely valid with regard to future 
property, that is to say, the right to cultivate new lands. 
In most new countries and colonies, there is still a large 
public domain which is rapidly being cut down by enormous 
grants of land, or sales made at very low prices by the gov- 
ernment. We believe that the government could easily have 
retained the proprietorship of this soil, and merely granted 
leases to individual cultivators. In this way the government 
could have retained control of property that will ultimately 
become very valuable, thus making it much easier, perhaps, 
for future generations to solve the social problem. 2 But the 
evil effects of private property in land are least felt in those 
very countries in which it would be an exceedingly simple 

1 Many of the present possessors of the land having paid the full price in 
good faith, it would, as Francis Walker declares, be simple robbery for the 
state to reassert its interest in the land without fully indemnifying the owners. 
If the present system is changed, why should the burden be thrown upon the 
single class of landowners ? 

2 Refer to the note on page 000. The Dutch government has followed this 
plan with its vast colonial possessions. It has not sold the land, but leased it 
for periods of about 75 years. In Australia a league that was formed for the pur- 
pose of introducing the same system there did not meet with success. The prin- 
ciple of national ownership has been adopted in a somewhat platonic form by 
New Zealand, the government of which leases the land for a period of 999 years. 

Even in old countries this plan could be applied in the case of mines. 
The ownership of mines is distinct and different, economically and legally, 
from property in land. 



LANDED PROPERTY IN NEW COUNTRIES 619 

matter to prevent them. In fact, private property in land 
lias innumerable advantages and no disadvantages in a new 
country still in the early stages of its economic development, 
— such as the Argentine Republic or Australia. In these 
countries, landed property is confined to areas that have 
been cleared, and spreads only with the spread of cultiva- 
tion ; hence this property is hallowed, as it were, by labor. 
The soil under private ownership, moreover, represents but 
a fraction of the whole soil, and land is still superabundant ; 
therefore, land and agriculture, like any other commodity or 
occupation, are subject to the law of competition and do not 
constitute monopolies. 

With the development of society, however, and as the 
population becomes denser, the character of landed property 
begins to change and gradually acquires the nature of a 
monopoly; this monopolistic nature, moreover, continually 
becomes more pronounced. And when this stage is reached, 
it is too late to buy back the land. 1 

1 It is not a mere coincidence that Henry George's theories have found so 
wide an acceptance in Great Britain, where there is now no general customary- 
access to portions of the soil for the great mass of the people, and where the 
great majority of the population, in Ireland as well as England and Scotland, 
depend on a few landowners both for a dwelling-place and for an oppor- 
tunity to carry on any kind of production. According to an unsigned 
article on Land in Bliss's " Encyclopaedia of Social Reform," " in England 
only one person in twenty is an owner of land ; in Scotland, one in twenty- 
five ; in Ireland, one in seventy-nine ; and the great majority of landholders 
in Great Britain own less than one acre each." 

Nor is it a simple coincidence that the greatest American advocate of the 
single tax made most of his observations in San Francisco, at a time when 
the number and wealth of the population was increasing at a marvellous rate, 
and many fortunes were made by the sale of unimproved land, the value of 
which increased enormously in a very brief space of time. It is in large 
cities, and especially in rapidly growing cities in new countries, that the 
unearned increment of land is most striking. Take an example of this : 
Mr. F. R. Chandler, a Chicago Real Estate Agent, found that a quarter acre 
of raw prairie land now at the intersection of two prominent business streets 
in that city, which, in 1830, was worth $20, or the equivalent of 13£ days' 
labor at $1.50 a day, in 1894 was worth $1,250,000, or the equivalent of 
2777 years' labor. 



620 PRINCIPLES OF POLITICAL ECONOMY 



VII. The Subdivision of Property in Land 

Social evolution, by which property in land tends ever 
more closely to resemble property in capital or commodities 
(see page 605), naturally diminishes the evils of the indi- 
vidual ownership of land. 

It facilitates, on the one hand, the division of land, thus 
distributing the land among a large number of persons. And 
what danger, we are led to ask, can there be in a monopoly 
when millions of men, including a majority of the citizens 
(as in the United States and France) share in it ? 

It facilitates, on the other hand, the transferability of land, 
that is to say its rapid and frequent change of ownership, 
thus depriving the unearned value of the land of the char- 
acter of a perpetual and increasing advantage. The increase 
of unearned value, being as a rule very slow and intermittent, 
produces scarcely perceptible effects during the short time 
that the property is in the possession of the same person; 
it is, moreover, taken into account whenever the land changes 
owners. 

The forces which bring about these two results are pri- 
marily economic. But legislative bodies are certainly able to 
exert great influence by adopting measures for either favor- 
ing them or counteracting them, as the case may be. 

In old countries, where land is scarce, the establishment 
of a protectionist system, for example, would manifestly tend 
to aggravate the monopolistic character of land-ownership, 
whereas free trade would impair it by admitting the compe- 
tition of foreign soils. 

Again, the laws of inheritance are potent factors for good 
or evil in this respect. In England, for instance, the legis- 
lature, prompted by a desire to maintain the position of the 
aristocracy, which has helped make the nation great, has 
established a number of " rights " which make it well-nigh 
impossible to alienate the land, and which thus keep the 



PRIMOGENITURE AND ENTAIL 621 

land almost by force in the constant possession of the same 
family, In addition to countless expenditures and formali- 
ties attending the transfer of land, there is the "right of 
primogeniture," the "right of entail," the "right of substitu- 
tion," etc. By the first of these "rights," the eldest son in- 
herits the real estate of an intestate person, in exclusion of 
the younger sons and all the daughters ; by the second, the 
inheritance of an estate is limited to a particular class of per- 
sons and its sale prohibited ; by the third a series or succes- 
sion of heirs is established, from which the law allows no 
deviation. Because of such devices as these landed property 
nowhere appears more odious than in Great Britain. 1 
Marked by the original and indelible stain of confiscations 
following the Norman conquest and the mastery of Ireland, 
and the wholesale usurpation carried on in the fifteenth and 
sixteenth centuries, when the common lands came into the 
possession of the landlords (by so-called " enclosure "), Great 
Britain offers the scandalous spectacle of colossal fortunes 
obtained without exertion and increasing with the growing 
number and wants of the disinherited masses. 

The right of primogeniture has long passed away in the 
United States, and almost all the states of the Union nar- 
rowly limit the power of entailment. Throughout continen- 
tal Europe, moreover, these and similar privileges have been 
curtailed or abolished. In France, for example, since the 
Revolution of 1789, the law requires that estates shall be 
divided equally among all the children of deceased parents, 
or, in the absence of children, among the other relatives. 2 

1 There are 1,200,000 landowners in the United Kingdom, but the immense 
majority of them, at least three-fourths, own insignificant plots of less than 
an acre ; just enough for a cottage and garden. A more accurate idea of the 
distribution of land may be obtained from these facts, together with the 
data given on page 613, note 2 : Half of England and Wales is owned by 
4500 persons, half of Ireland by 744 persons, and half of Scotland by only 
70 persons. 

2 Article 826 of the French Civil Code decrees not only that an estate shall 
be divided into parts having equal values, but that the estate itself shall actu- 



622 PRINCIPLES OF POLITICAL ECONOMY 

This has had quite as pronounced an effect on the distribu- 
tion of land as the English system, but in precisely the 
opposite direction. It has resulted in cutting up the land 
into small sections. 1 Unfortunately this system does not 
only cut up the large estates, but it also divides the small 
ones into fragments, and thus carries the partition of estates 
far beyond the limits compatible with good husbandry. It 
jeopardizes the interests of agriculture without accomplish- 
ing anything in the interests of democracy. It even violates 
the aim which it has in view, for after the division of estates, 
or when estates are sold to share the proceeds, small heri- 
tages are often purchased at ridiculously low prices by the 
owners of large estates. 

ally be divided into equal parts. That is to say, the smallest plot of ground 
and the humblest cottage must be divided. If the heirs cannot arrange 
matters among themselves, the estate must be sold by the authorities, at con- 
siderable expense to the heirs. 

1 According to the agricultural statistics for 1892, persons engaged in agri- 
culture in France were classified as follows : — 

Owners managing their own farms . . . 2,199,220 or 38% 
Farm-hands, servants, and day-laborers working 

for an employer ...... 3,275,890 or 49% 

Persons working part of the time for themselves 
and part as day-laborers or farm-hands for 
others 1,188,025 or 18% 

The first and the third classes comprise independent cultivators, i.e. those 
who cultivate their own farm or who have charge of its cultivation. The total 
number is 3,387,000, which, when we add their families, means a population 
of 12,000,000 persons, or a little more than half the agricultural popula- 
tion. (Compare the figures for the United States, page 606, note 2, and page 
613, note 1.) 



CHAPTER IV — PROFITS 
I. The Nature and Definition of Profits 

We have already had occasion to speak of the important 
person whom economists call the entrepreneur (the projector 
and manager of an enterprise), and we know that his income 
is called profits. But it is difficult to define the exact 
nature of his function and of his income. We may distin- 
guish the following three explanations, or theories, of the 
part played by the entrepreneur and of the essential nature 
of profits : — 

(1) English economists have usually regarded the entre- 
preneur and the capitalist as identical, and have designated 
both by the latter name. They have therefore regarded 
profits as a capitalistic income, analogous to interest, but 
fixed at a somewhat higher level for reasons which we shall 
state presently. 

It must be admitted that this way of looking at things 
seems quite in conformity with facts. In practice, it is the 
entrepreneur who possesses all, or at least part, of the capital 
necessary for carrying on a business enterprise. In practice, 
the rate of profit goes hand in hand with the rate of interest 
and is calculated in the same way, viz. as a certain "per 
cent " of the capital employed. It is considered natural that 
the entrepreneur who has " put into " an enterprise $1,000,000 
should realize ten times as much profit as an entrepreneur 
who has employed only $ 100,000. 

This interpretation, however, must be abandoned, for 
although the entrepreneur is generally also a capitalist, this 
is not so because of any necessary connection between their 
functions ; but, as we shall see, only because capital confers 

623 



624 PRINCIPLES OF POLITICAL ECONOMY 

on its possessor a kind of monopoly. The part of the 
entrepreneur and that of the capitalist are nevertheless 
distinct in theory and sometimes separate in practice ; for 
there are entrepreneurs who are not capitalists and who 
carry on business only by means of borrowed capital. 

(2) French economists, on the other hand, and first of all 
J. B. Say, clearly separated the part of the entrepreneur from 
that of the capitalist, and regarded the former as economi- 
cally distinct from the latter; they invented the name by 
which he is now known. In their opinion, the predominant 
characteristic of the entrepreneur is the performance of a 
certain kind of labor. Profits, therefore, are the remunera- 
tion of labor ; but of a particular kind of labor, different 
from manual labor, superior to it from the standpoint of 
productivity, and consisting of the following elements : — 

(a) Invention, which, as we have seen, is the primordial 
act of production (page 74). All great industrial fortunes 
are the result of inventions (Bessemer steel, Singer sewing- 
machines, etc.). The truly productive act is thought, the 
conception of ideas. The entrepreneur must have ideas, — 
not necessarily sparks of genius, but business ideas, — and, 
above all, he must discover what will please the public. 
It is not enough for the entrepreneur to invent new com- 
modities or new varieties of commodities ; he must, so to 
speak, invent new wants. 

(5) Superintendence. It is a fundamental law of political 
economy that collective labor is more productive than isolated 
labor, on condition, however, that it be organized, disciplined, 
and commanded by some one. There must be somebody to 
divide the work and give every laborer his proper place. 
This is the part of the entrepreneur, and for this reason he 
is called the "captain of industry." Business, in fact, is 
very much like war. The commander-in-chief wins or 
loses the battle. No doubt good soldiers and good weapons 
contribute to the victory, but they are the conditions of 
success, not the real cause. One proof of this consists in 



THE NATURE AND DEFINITION OF PROFITS 625 

the fact that good troops with the best equipment will be 
beaten if they are badly commanded. In business matters, 
too, generalship is everything. Everyday experience shows 
that of two enterprises employing an equal number of work- 
men possessing the same ability, one succeeds and the other 
fails miserably, simply because one has better leadership. 

(<?) Commercial speculation. It is no difficult matter to 
produce goods. The great problem is to sell them, — to find 
a market for what has been produced. Hence, business 
enterprises now tend more and more to become speculative 
in character. In other words, business consists to an in- 
creasing degree of the art of buying and selling on the most 
favorable terms. This art is one of the principal accom- 
plishments of the successful entrepreneur. It is, moreover, 
of the greatest social importance, inasmuch as commercial 
speculation reestablishes the economic equilibrium constantly 
disturbed by production and consumption. 

There is much truth in this second explanation also. 
Nevertheless, it does not set forth clearly the essential 
nature of profits, nor does it entirely escape the suspicion 
that it was devised, at least in part, for the purpose of de- 
fending profits against the attacks of socialists. Every one 
of the tasks above enumerated as belonging to the entre- 
preneur — invention, commercial speculation, and even 
superintendence — may be committed to the exclusive 
charge of hired employees (engineers, chemists, buyers, com- 
mercial agents, managers, superintendents, etc.). And, as 
a matter of fact, all large enterprises organized as " com- 
panies " employ men to perform the several tasks of the 
so-called entrepreneur. 

(3) A great many economists, finally, consider the entre- 
preneur as possessing a monopoly, somewhat like that of the 
landowner, yet differing from it in some important respects. 
Profits, therefore, are a monopolistic income or so-called 
" monopoly surplus." This monopoly may be a natural one, 
resulting from exceptional personal abilities or from certain 



626 PRINCIPLES OF POLITICAL ECONOMY 

advantages of situation or opportunity. Or it may, on the 
other hand, be a legal monopoly, and be due, for example, 
to a protective tariff, or to the exclusive possession of 
certain inventions. It may be due to any of a host of cir- 
cumstances, for monopolies are by no means exceptional. 
The monopoly element is present everywhere. The small 
grocery store at the street corner enjoys a monopoly because 
of its location. A man's individuality, that is to say the 
simple fact that he is himself and not some one else, really 
constitutes a monopoly. 

This theory is most consistent with facts. It explains, 
moreover, why the entrepreneur generally happens to be also 
a capitalist. As no business can be undertaken without a 
certain amount of capital, and the necessary capital must 
often be borrowed, the possession of capital really consti- 
tutes a monopoly that can be made to provide a revenue 
for the owner. It also explains why exceptional personal 
qualities, such as those pointed out by the partisans of the 
theory that profit is due to labor, may be the source of large 
profits and of great wealth — simply because these qualities 
also constitute monopolies. 

We must not conclude that profits are necessarily unjust ; 
we have, in fact, already admitted that in many cases mo- 
nopoly is more in conformity with the public interest than 
competition. (See page 152, etc.) 

Those who become wealthy because of exceptional personal 
ability do no harm to others. Again, the monopoly of entre- 
preneurs consists not in their being able to sell goods above 
the current prices, but in the possession of a secret or of 
some advantage which enables them to make goods at less 
than the ordinary cost of production ; and decreased cost is 
in perfect harmony with public welfare. 1 

1 At all events, it should be noted that whenever there is any injustice on 
the part of entrepreneurs, the consumer, i.e. the purchaser of the goods, is 
usually the victim of the monopoly, rather than the workmen engaged in the 
enterprise. 



THE LAWS WHICH DETERMINE PROFITS 627 

II. The Laws which determine Profits 

How are profits calculated? Nothing would seem to be 
easier. The manager or owner of the smallest enterprise 
knows perfectly well how to find out what his profits are. 
He simply subtracts the cost of production from the value 
of the finished product (i.e. its current price in the market), 
and calls the remainder his profit. 

Yet this apparently simple operation involves one of the 
difficult points of theoretical economics. The difficulty con- 
sists in determining precisely what should be included under 
the "cost of production." 

It should include, first, — there is no difficulty on this 
score, — the wages paid by the entrepreneur to the laborers 
in his employ ; it should also include, in case he has bor- 
rowed all or part of the capital, the interest he must pay to 
the capitalist. These are the two essential parts of the cost 
of production. If we let V represent the value of the fin- 
ished product, W the wages, and I the interest, then _P, the 
profit, would be determined by this simple formula : — 

p= V- (W+I). 

But are not several elements missing from this formula? 
Why does it not include rent, as well as interest and wages ? 
The entrepreneur is supposed, theoretically, to unite the 

Profit differs from land-rent for two reasons : — 

(1) Because the monopoly due to land-rent always possesses a real, im- 
personal, and more or less permanent character, while profit is of a personal 
and temporary nature. 

(2) Because land-rent arises either (as Ricardo thought) from the increase 
in the cost of production, or (what is more strictly true) from the increase 
of human wants ; whereas profit, as we have just said, is generally due to a 
decreased cost of production in certain industries or establishments. 

Although the maximum cost of production alone governs the rent of land, 
the minimum cost of production sooner or later regulates the rate of profit, 
because the monopolist will ultimately be ousted from his privileged position 
by other entrepreneurs, and because, moreover, it is in his own interest to 
lower prices. (See page 589, note 1.) 



628 PRINCIPLES OF POLITICAL ECONOMY 

factors of production, which include not only labor and capi- 
tal, but land also. In practice, moreover, he often has to 
rent land. Why, then, does the "cost of production" not 
include the expense of obtaining the third factor of produc- 
tion, as well as the cost of the other two ? 

Economists of the English school answer, — basing their 
reply on Ricardo's theory — that the rent of land is never a 
part of the cost of production, because it is the cost of pro- 
duction which determines rent. (See page 587.) But this 
doctrine is too absolute. In all cases where rent is the 
price of a genuine monopoly, such as buildings and land 
situated in cities or near a waterfall serviceable for produc- 
tive purposes, it is certainly part of the cost ; and if the 
entrepreneur is obliged to pay rent for such truly monopo- 
listic advantages, this rent should be counted as part of the 
cost of production, in addition to wages and interest. In 
brief, the entrepreneur should deduct from the value of the 
product the shares due to all his collaborators. Nothing 
could be plainer than this. 1 

But the entrepreneur generally furnishes something him- 
self, — perhaps the land and buildings, perhaps all or a 
part of the capital, and, in any case, the labor of a certain 
amount of organization and superintendence. Should not 
the rent of this land, the interest on this capital, and the 
wages for this labor also be reckoned as part of the cost 
of production ? What does it matter that these elements 
happen to be furnished by the entrepreneur personally, and 

1 It follows from the above that for the entrepreneurs the cost of produc- 
tion consists of the incomes received by their collaborators in production, 
that is to say, the incomes of the other classes of society : wage-workers, 
landowners, and capitalists. Must these incomes be counted as the cost of 
production for the nation as a whole ? Certainly not. For the nation, the 
cost of production is different from that of the entrepreneur. The cost of 
production for the nation consists of the sum total of values consumed (i.e. 
destroyed) in the process of production, — the value of the circulating capital 
and only the cost of renewing fixed capital, — and profit consists of the differ- 
ence between the values produced and the values consumed. 



WHAT IS THE COST OF PRODUCTION? 629 

that he has no need to employ or borrow them ? Is he not a 
landlord or capitalist or wage-earner if he furnishes land 
or capital or labor ? If he had not applied this land, capital, 
or labor to his own business, he could have used them else- 
where ; he might have rented his land and buildings to a 
tenant, invested his capital in some one else's business, and 
applied his labor and intelligence in some other enterprise. 
His own business ought therefore to yield at least enough to 
pay him the equivalent of what he could have received in 
any other way, else he will not engage his land, capital, labor, 
or intelligence in this enterprise. 1 

But how are we to ascertain the value of the various pro- 
ductive elements furnished by the entrepreneur personally ? 

As for land and buildings, nothing could be more simple. 
Find out what the entrepreneur would have been obliged to 
pay to obtain similar land and buildings from another 
landlord. 

As for the capital, the matter is equally simple. Find out 
the current rate of interest, — that which the entrepreneur 
would be compelled to pay for borrowed capital, and what 
he probably does pay for capital that he actually borrows. 
As a matter of fact, in every accurate system of accounts 
the entrepreneur distinguishes the interest on his capital 
from the other receipts of an enterprise. This interest, 
however, should be estimated at a higher rate than the 

1 Yet if we examine closely the enterprises that are carried on in any 
country, it would certainly not be difficult to find some that do not yield 
enough to pay the current rate of interest on the capital engaged in them. 
Why. in spite of this, are they still carried on ? 

This apparent anomaly is easily explained when we examine into the 
nature of the capital engaged in these businesses. If it consists largely of 
fixed capital, it is next to impossible to transfer this capital to some other 
business, even should the owner desire to do so. The only thing to be done, 
therefore, is : either to abandon this capital entirely and count it as just so 
much wasted wealth, or be content with whatever return it happens to yield, 
no matter how small. The second alternative is clearly preferable ; for it is 
better to lose part of one's capital than lose it all. This state of affairs 
occurs frequently with railroad companies, traction companies, mines, etc. 



630 PRINCIPLES OF POLITICAL ECONOMY 

current rate of interest, because the return from capital 
engaged in direct, active production is variable, whereas 
the income arising from loaned capital is fixed. 

Take, for illustration, a business which yields returns so 
variable that every other year there are no profits. Should 
the current rate of interest on loans be five per cent, the 
entrepreneur's return on his own capital must be ten per 
cent, in order to produce an income averaging as high as 
that due to the loan of capital at the current rate of interest. 
This difference in rates is a premium for insurance against 
risks. 1 

The problem is a more difficult one with regard to the 
personal labor of the entrepreneur. What compensation 
ought he to receive? Economists answer that he should 
receive the same compensation as that which he would be 
obliged to pay an employee able to take his place (i.e. a 
manager or director), or whatever he himself could expect 
to receive if his services were engaged by another employer. 
This remuneration is, doubtless, fixed very arbitrarily. 
Many entrepreneurs, however, keep an account of the salary 
which they attribute to their own services, and enter this 
item on their books as part of their expenses. 2 

1 This " insurance premium" against the entrepreneur's risks must not 
be confounded with the "premium" referred to as constituting part of the 
interest for capital as commonly understood (page 567). The latter con- 
cerns the possible loss of loaned capital, while the former has to do only with 
the variability of the entrepreneur's income. This premium plays no part in 
the case of the capitalist who invests in all the industrial enterprises of a 
nation, or in all the enterprises engaged in any one branch of production, 
such as coal-mining. Careful capitalists do not "put all their eggs into 
one basket." 

2 There can be no doubt that the salary which the employer will regard as 
a sufficient payment for his own services will be larger than that which he 
would pay to an employee of equal ability. It will even be greater than that 
which he could expect to receive if he were in the employ of another entre- 
preneur. This is natural and just ; for we must take into account the respon- 
sibilities, the anxieties, and risks of the entrepreneur's occupation. We do 
not now refer to the danger of losing his capital (which has already been 
taken into account), but the risk of losing his economic position and his 



THE LAWS WHICH DETERMINE PROFITS 631 

These, then, are nearly all the elements in the cost of pro- 
duction. 1 All we have to do now is to add them, and deduct 
the total from the value of the product ; what remains is 
profit. But when we have taken into account all the ele- 
ments enumerated above, and deducted them from the gross 
results of an enterprise, it is not at all improbable — how- 
ever surprising this may appear — that there will be nothing 
left. 

There will be a remainder only when the value of the 
finished product exceeds the total cost of production, and 
this is possible only when the entrepreneur is in possession 
of some sort of monopoly. (See page 194, note.) But if 
there is no monopoly-element, if industry is entirely subject 
to free and full competition, — that is to say, if the entre- 
preneur brings nothing on the market except what anybody 

business reputation. If a man could not earn more as an entrepreneur than 
as manager or superintendent for some one else, it would be better for him 
to enter some one's else employ ; he would at least gain peace of mind by 
the change. As a matter of fact, many persons offer their business intelli- 
gence and organizing abilities to others, rather than undergo the constant 
worry and mental strain involved in carrying on their own business under a 
system of keen competition and frequent industrial collapses against which 
even the wisest and most far-sighted men are unable always to make ample 
provision. 

1 Should not the cost of the raw materials and the cost of transportation 
occupy an important place in a list of the expenses of production? From 
the standpoint of the individual entrepreneur, they must be counted. But 
when we are attempting to determine profits in general, i.e. for all enter- 
prises, they must be omitted, because the cost of raw materials is in turn 
made up of wages, interest, and the returns of the preceding entrepreneur ; 
this entrepreneur's raw materials are in turn made up of the same ele- 
ments, and so on until we reach the first links in the chain of productive 
activities. 

If our calculation of the costs of production is to be perfectly correct and 
complete, however, there are other elements which must be included, e.g. 
the cost of renewing capital which exists in the form of concrete goods, and 
taxes paid to the government, which may be regarded as an indirect col- 
laborator in production who insists on receiving a share of the proceeds. 
The cost of renewing capital plays no part in the case of money-capital, 
which is a kind of wealth neither perishable nor subject to wear and tear. 
(See page 572, note 3.) 



632 PRINCIPLES OF POLITICAL ECONOMY 

else can offer, — there is no profit. This fact need cause no 
surprise. It is a necessary consequence as well as a con- 
firmation of the definition of profits given in the preceding 
section. It is, moreover, both inevitable and just. 

It is, first, inevitable. For if competition among entre- 
preneurs is free and complete, they will always engage in 
those enterprises which hold out the inducement of a profit. 
Competition among entrepreneurs will tend to keep the 
value of products exactly on a level with their cost of 
production. (See page 139.) 

It is, in the second place, just. For when the entrepreneur 
has received — above and beyond the parts of the product 
which he is obliged to give to his collaborators in production 
— the interest on his own capital, an indemnity for all the 
risks he has incurred, and an equitable compensation for his 
labor of superintendence, what more can he properly claim ? 1 

III. The Legitimacy of Profits 

In more than one sense, the entrepreneur plays a leading 
part in modern industrial life. For this reason he is the 
principal target of socialistic attacks. 

1 Professor Walras employs a formula which at first seems astounding 
when he declares that the normal rate of profits is zero. By this statement 
he means that upon the supposition of absolutely free competition — a 
hypothesis which serves as the very basis of this author's system of mathe- 
matical equations concerning economic forces — the price which the entrepre- 
neur pays for productive services (including his own) must necessarily be 
equal to the price for which he sells the finished product ; profits must there- 
fore be equal to zero. 

This amounts to saying that the sole normal income of the entrepreneur 
is that which he receives as remuneration for his labor or for the use of his 
capital, and that the surplus (which is generally called profit) is purely 
accidental. 

Walras's theory, which at first appears paradoxical, will become plainer 
if we examine profit in its simplest form — that of dividends. Take two 
capitalists, each of whom has invested the same amount in the same enter- 
prises, the first having purchased only shares of stock, the second only inter- 
est-bearing securities. In this case, the theory stated above means simply 
that in the long run — say fifty years — both of these capitalists will receive 



LEGITIMACY OF PROFITS 633 

Robert Owen declared nearly a hundred years ago that 
profit is the fundamental cause of all economic ills, and 
endeavored to abolish profit by means of a " Labor Ex- 
change," 2 at which laborers could exchange their products 
for labor coupons and use these coupons to purchase what- 
ever they wanted, without having anything to do with an 
entrepreneur and therefore without having to pay him a 
tribute in the form of profits. 

But the socialistic objections to the entrepreneur were 
more or less vague and indefinite until the publication of 
Karl Marx's book on Capital. The arguments which this 
formidable adversary brings to bear against the institution 
of profits are summarized in the following paragraphs. 2 

The comparison established by some economists between 
the entrepreneur and the laborer, says Marx, is absurd, or at 
least out of date. There was a time when the employer 
worked side by side with his workman, primus inter pares, 
and could properly be considered as a worker and a producer. 
The same condition of affairs may even now be found, by 
way of exception, in small scale industries. But under the 

exactly the same total income, despite the fact that one receives only interest 
and the other only dividends. This conclusion, we believe, will be accepted 
as true by experienced business men. 

It is even possible that when all is taken into account, the income consist- 
ing of dividends will be smaller than that in the form of interest, because 
men are usually disposed to overestimate the chances of success in an enter- 
prise, and to underestimate the possibilities of failure. 

1 Owen's Labor Exchange must not be confounded with De Molinari's 
scheme of a kind of bureau where workers may obtain information regarding 
the demand and supply for various kinds of labor, although the latter scheme 
is also known as a labor exchange (Bourse de Travail). (See page 535, 
note 1.) 

2 We have already pointed out, in connection with our discussion of the 
legitimacy of interest, that the so-called scientific socialists (Rodbertus, 
Marx, Lasselle, etc.) regarded the incomes of landlords, capitalists, and 
entrepreneurs as essentially of the same nature ; each of them is held to be 
due to the spoliation of the working classes. The essential features of the 
" exploitation theory " are the same with regard to profits as with regard to 
interest. (See page 560.) 



634 PRINCIPLES OF POLITICAL ECONOMY 

system of large-scale production, — manifestly the sole pro- 
ductive method of the future, — the employer is exclusively 
a capitalist. He happens to be an employer simply because 
he is rich, just as under the ancien regime in Europe certain 
men became army officers simply because they belonged to 
the nobility. The employer derives profit from his capital 
just as any other merchant does, i.e. by buying and selling 
goods. What does he buy ? The productive power of the 
workman, known as labor. What does he sell ? The same 
power transformed and made concrete in the shape of com- 
modities. The difference between the two constitutes his 
profit. 

But how, according to Marx's theory, can there be any 
such difference or profit-constituting surplus ? For we 
must not forget that, according to Karl Marx, the sole value- 
producing factor is labor. Does it not follow that the fin- 
ished product cannot be worth more on the market than the 
labor of the workmen who made it, and that therefore profit 
cannot arise ? The solution of this knotty problem, this 
"mystery of iniquity," constitutes, in the opinion of many 
socialists, Marx's chief claim to scientific glory. Let us 
listen to the socialistic argument. 

The value of products offered for sale by the entrepreneur 
is determined by the labor which it cost to produce them. 
Suppose a workman takes ten hours to produce a given 
article : the value of that article is equal to ten hours of 
labor. But it does not follow that the entrepreneur must 
pay the workman a wage equivalent to ten hours' labor. 
He pays the workman just what his labor is worth. And 
the worth of his labor, like the value of a machine or any 
other commodity, is determined by the cost of production. 
When we have to do with the productive machine called 
" man," producing the commodity called " labor," the cost 
of production means simply the expense necessary to raise 
(i.e. to produce*) a workman and to keep him fit for work 
(i.e. to support him). Let us assume that the expenditure 



PROFITS ARE LEGALIZED ROBBERY 635 

necessary to support the laborer and to keep him in fit con- 
dition is equal to five hours' labor a day, on the average. 
In this case the employer, by giving the laborer wages 
equivalent to five hours' labor, pays him just what his labor 
is worth, according to the laws of value and exchange. Yet 
it is evident that the employer thus makes a large gain. 
He pays only the equivalent of five hours' labor, and by 
the sale of the product he realizes the equivalent of ten 
hours' labor. Hence he gets five hours' labor without pay- 
ing for it — five hours' labor which the workman furnishes 
gratuitously for the benefit of his employer. The employer's 
profit, therefore, is a certain amount of unpaid labor. This 
is the whole secret of capitalistic exploitation. 

Is the objection raised that the above figures are arbitrary 
suppositions ? To be sure they are. But, says Marx, there 
is nothing arbitrary or imaginary in the general rule that the 
value produced by a man's labor is greater than the value required 
to support him. This is true even of the isolated laborer in 
primitive society; else civilization could never have begun, 
nor could population ever have increased. How much 
truer, therefore, it must be with regard to the civilized 
laborer wdiose productive power is multiplied by the divi- 
sion of labor and by collective organization! The employer, 
having acquired possession of this power by purchasing it, 
invents a multitude of ingenious schemes for increasing its 
productivity, — such as lengthening the day of labor, stimu- 
lating the workman to increased effort by the deceptive 
device of "piece wages," and introducing machinery that 
enables him to make profitable use of the cheap labor of 
women and small children. 

The price which the employer pays for manual labor, 
moreover, varies directly with the laborer's cost of living ; 
and the progress of civilization tends constantly to decrease 
this cost. If it were possible, for example, to increase the 
productivity of labor so greatly that five minutes would be 
enough to produce a man's daily food, a day's work would 



636 PRINCIPLES OF POLITICAL ECONOMY 

be worth the product of five minutes' labor. The employer, 
having control of the entire productive process simply be- 
cause he has control of that indispensable factor, capital, 
would pay a wage equivalent to five minutes' labor, keeping 
for himself all the rest, i.e. the value produced during the 
other nine hours and fifty -five minutes. 1 

This elaborate display of dialectic, designed to prove 
that profit, by its very nature, is based on spoliation and 
cannot exist otherwise, is founded on the assumption that 
the value of manual labor, like that of merchandise, is 
determined solely by the cost of production. But if we 
refuse to accept this fundamental assumption as a true and 

1 Eodbertus developed a theory closely resembling that of Marx. We 
quote the following passages, reminding the reader that Rodbertus defines 
the term rent (Bente) as "all income secured without personal exertion 
solely in virtue of possession"; rent, therefore, means all income except 
that due to personal labor. 

" As there can be no income unless it is produced by labor, rent rests on 
two indispensable conditions. First, there can be no rent if labor does not 
produce more than the amount just necessary to enable the laborers to con- 
tinue their labor ; for without such a surplus no one, unless he himself labors, 
can regularly receive an income. Secondly, there can be no rent if arrange- 
ments do not exist which deprive the laborers of part or all of this surplus 
and give it to others who do not themselves labor ; for in the nature of things 
the laborers themselves are always the first to come into possession of their 
product. That labor yields such a surplus, is due to economic circumstances 
that increase the productivity of labor. That this surplus is entirely, or in 
part, withdrawn from the laborers and given to others, rests on grounds of 
positive law ; and as law has always united itself with force, it effects this 
withdrawal only by continual compulsion. 

" This compulsion originally took the form of slavery, the origin of which 
is contemporaneous with that of agriculture and landed property. The 
laborers who created this surplus were slaves, and the master to whom the 
laborers belonged, and to whom consequently the product itself also belonged, 
gave the slaves only so much as was necessary for the continuance of their 
labor, keeping the remainder or surplus for himself. When all the land has 
passed into private property, and at the same time private property exists 
in all the capital of a country, then property in land and capital exert a simi- 
lar compulsion even upon freedmen or free laborers. Like slavery, this state 
of affairs means, first of all, that the product does not belong to the laborers, 
but to the masters of land and capital. It means, in the second place, that 
laborers who possess nothing, — while the masters possess land and capital, 



LEGITIMACY OF PROFITS 637 

complete explanation of value, 1 — if, as many economists 
maintain, this theory is inadequate even in the case of ordi- 
nary commodities and inapplicable to labor, — the whole 
argumentative structure erected upon it collapses. 

In spite of this, the socialistic argument possesses consider- 
able critical value as a scathing and partly justifiable arraign- 
ment of the present social organization based on the employer 
system and the wage system. There is especially a large 
share of truth in the contention that labor has been treated 
as a commodity to be bought and sold like any other com- 
modity. Employers have, as a matter of fact, tried to 
obtain labor as cheaply as possible ; and during many cen- 
turies they have been wonderfully successful in this endeavor. 
But in reply to these charges we may call attention to those 
new phenomena that were pointed out when we discussed 
the subject of wages : trades unions, labor laws, cooperation, 
and the whole group of measures tending to regulate the 
rate of wages by other laws than those which govern the 
price of merchandise. 

Nevertheless, while insisting that profits are not neces- 
sarily illegitimate, nor the employer necessarily a spoliator, 
we may raise the question whether the office or " social func- 
tion " of the entrepreneur is an indispensable and permanent 
one, as most economists would have us believe, or whether 
it is, on the other hand, merely a "historical category," i.e. 
the result of forces and exigencies which arise in the course 
of economic evolution and may sooner or later disappear. 

— are glad to receive a part only of the product of their own labor, in order 
that they may support life with it, i.e. sustain their power to labor. Thus, 
instead of the commands of the slave-owner, we have a contract between 
laborer and employer ; but this contract is a free contract only in name, not 
in reality, and hunger makes a good substitute for the whip. What was 
formerly called food is now called wages." 

Rodbertus regarded the income of the capitalist, entrepreneur, and land- 
lord, as plunder ; or, as he himself said, legalized robbery of the products of 
others' labor. 

1 See pages 59 ff. 



638 PRINCIPLES OF POLITICAL ECONOMY 

This is quite a different question from that regarding the 
present legitimacy of profits. 

We have seen that in the last analysis the function of the 
entrepreneur is to buy productive services in order to sell 
them again in the form of commodities ; he serves as an 
intermediary between laborers, capitalists, and landowners, 
— on the one hand, — and the consumers of goods, — on the 
other hand. But the role of intermediary, or go-between, is 
not of such paramount social importance that its suppression 
is inconceivable. Indeed, the general tendency to-day is in 
favor of the abolition of all intermediaries. We have called 
attention to this tendency with regard to tradesmen and 
storekeepers; the same tendency is equally perceptible and 
desirable with regard to entrepreneurs. 1 

There are even now many successful stock companies and 
corporations which appear to get along without the entre- 
preneur or employer. This, in fact, is the strongest argu- 
ment used by collectivists to prove that the employer or 
entrepreneur is no longer a necessary productive agent, but 

1 This would not be true if profits were, as Professor J. B. Clark main- 
tains, " the lure to invention and to all the improvements which enlarge the 
general product of industry." With regard to Clark's position on this 
point, Mr. J. H. Hobson aptly remarks that the entrepreneur "certainly 
has the habit of collecting and utilizing inventions, but he does not as 
entrepreneur make the main body of them, neither does he make the main 
body of other industrial improvements. He is a middleman in regard to 
these matters. The great accessions to our wealth are due not so much to 
monopoly of capital and labor and the organization of it, as to specific appli- 
cations of the natural sciences to methods of industry. That is to say, the 
work is commonly done by the servants of the entrepreneur, who get a very 
small proportion of what would be equal to the actual value of the increased 
productivity which their labor creates. A great many inventions, including 
the greatest inventions of all, are not made for profit, and would be made if 
no profit attached to them. Those which do require some incentive of profit 
do not require the enormous profit which the entrepreneur is often able to 
take for them." ("Proceedings of the American Enconomic Association," 
1902, page 144.) 

The function of the inventor is of great social importance ; but it cannot 
be held that the suppression of the class of entrepreneurs would mean the 
suppression of inventive activity. 



ELIMINATING THE ENTREPRENEUR 639 

simply a social parasite. According to collectivists, the fact 
that nowadays the most important business concerns are not 
designated by the names of the individuals at their head, as 
formerly, but generally constitute joint-stock companies or 
corporations having no personal identity, is sufficient evi- 
dence that the entrepreneur no longer exists — if we use 
this term as political economists use it, i.e. to designate the 
person who is both the owner and director of an enterprise, 
and who receives profits in payment for daily work of a 
particular kind. The individual employer has been done 
away with ; or, rather, his place is taken by a multitude of 
idle stock-holders. - If we do away with these stock-holders 
as well, the enterprise will continue precisely as before. 
Present economic evolution, by which large-scale production 
is everywhere being substituted for small-scale methods, and 
by which impersonal corporations and large stock companies 
are taking the place of small individual enterprises, will soon 
reduce all employers and entrepreneurs to mere stock-holders 
whose sole task is to detach coupons and collect dividends. 
Whereupon, according to the collectivists, their uselessness 
being patent to everybody, their social function will be at 
an end. 

It is perfectly evident that mere stock-holders — the 
" sleeping partners " — of a business concern do not play a 
very active part in business life. For this reason we have 
said repeatedly that the rise of this new kind of property 
(called shares of stock) and this new variety of income (called 
dividends) jeopardizes the existence not only of the class 
of employers and entrepreneurs, but also the institution of 
private property itself. It may indeed be said, in agreement 
with most economists, that these corporations extend the 
ownership of capitalistic enterprises to a large number of 
persons and thus introduce a democratic element into mod- 
ern industrial life; but in our opinion a much more note- 
worthy characteristic of this state of affairs is that stock 
companies constitute an easy transitional step toward collec- 
tivistic expropriatino. 



640 PRINCIPLES OF POLITICAL ECONOMY 

The conclusions drawn by collectivists from the present 
tendency toward corporate forms of enterprise are, how- 
ever, largely illusory. Two points in particular should be 
noted : — 

(1) All stock companies, no matter how impersonal or how 
large they may now be, were originally founded by private 
individuals with a view to reaping profits ; nearly all of 
them, moreover, are still managed and controlled financially, 
if not technically, by one leading shareholder who is really 
an employer or entrepreneur. 1 

(2) In stock companies and corporations, moreover, the 
absence of an employer or entrepreneur (in the strict sense 
of the term) is really the cause of a marked inferiority, and 
involves disadvantages resembling those that are noticeably 
inherent in public administration. The hired superintendent 
of an industrial concern owned by a corporation is, indeed, 
like a government official : he is usually not so zealous as 
the man who looks after his own private affairs. The dis- 
advantages which would doubtless soon become apparent 
under collectivism, if ever it were introduced, are as follows : 
The absence of individual initiative and of that feeling of 
personal responsibility which prompts men to do their very 
best ; bureaucratic methods and " red tape " ; the waste of 
time and energy, of labor and capital — a memorable exam- 
ple of which is furnished by the early history of the Panama 

1 We do not deny that enterprises established a long while ago, and 
now perfectly organized for the transaction of business along well-defined 
lines — such as insurance companies and railroads — can get along very 
well without entrepreneurs or employers. Such enterprises are, in fact, 
entirely fit for transfer to governmental management. We maintain simply 
that the time is still far distant when we shall be able to dispense with the 
entrepreneur as a creator of new enterprises. In all dynamic, progressive 
nations, the entrepreneur will continue to be an indispensable power. He 
will be unnecessary only when human societies have attained a static, per- 
manent condition — which is not an altogether impossible state of affairs. 

Nor do we maintain that it is possible to get along without shareholders, 
that is to say, without the help of the savings of persons not directly con- 
cerned in the management of an enterprise. 



EXAGGERATION OF PROFITS 641 

Canal. We by no means share M. cle Molinari's opinion 
that stock companies are the ideal future form of productive 
enterprise. (See page 160.) 

Although economic evolution seems to point to the ulti- 
mate elimination of the class of employers and entrepreneurs, 
as well as the abolition of the wage system (of which em- 
ployers and entrepreneurs are an essential part), the time 
does not yet seem ripe for accomplishing this step. We 
shall presently find sufficient proof for this in the difficulties 
which cooperative societies for production, the purpose of 
which is precisely to do away with the employer, experience 
in organizing and carrying on their work. 

It should be noted, in conclusion, that there is a general 
tendency to exaggerate the rate of profits. The circumstance 
that the profits of an enterprise all go to one man or to a few 
men, while the wages are distributed among hundreds or 
thousands of sharers, leads to false ideas regarding the mag- 
nitude of profits as compared with wages. If all employers 
and entrepreneurs were done away with, and their profits 
divided among all the laborers, the latter would be surprised 
to discover how small an increase of their incomes would be 
the result of this expropriation. 1 

1 Mr. S. H. Adams, in an article in Scribner''s Magazine for January, 
1897, quotes the manager of a large department store to the effect that the 
profits of these stores are represented by the cash discounts on their bills. 
As it is well known that 5 per cent is a high average discount, we have here 
an index as to yearly profits. There was a time when 10 per cent profit was 
regarded as nothing extraordinary. Now it is considered decidedly advan- 
tageous. The Twenty-first Annual Report of the Massachusetts Bureau of 
Labor Statistics, based on returns from over 10,000 establishments in that 
state, declared that 7.61 per cent of these establishments did not make any 
net profit. The result for all industries indicated a net profit amounting to 
3.90 per cent of the selling price, and equivalent to 4.83 per cent on the 
capital invested. 

It should be added, however, that this report, like all statistics of profits. 
has been severely criticised. All figures on this subject must be suspiciously 
viewed. Indeed, it is extremely doubtful whether trustworthy data are 
obtainable. The term "profits" is so variously understood as to preclude 



642 PRINCIPLES OF POLITICAL ECONOMY 



IV. Profit-sharing 

In our discussion of the wage system as a method of re- 
muneration, we pointed out that one of its principal disad- 
vantages was the conflict to which it inevitably gave rise 
between employer and laborers. This is due largely or 
entirely to the fact that; — other things being equal — the 
higher wages are, the lower profits will be, and vice versa. 1 
This is what Ricardo meant when he declared that " every 
diminution in the wages of labor raises profits," whereas " a 
rise of wages invariably lowers profits." Constant strikes 
furnish ample evidence of this antagonism of interests. 
Under the existing economic organization of society, em- 
ployers and workmen constitute two separate groups, facing 
each other in an attitude of mutual opposition, yet each 
unable to get along without the other ; they are, almost in 
spite of themselves, bound together by ties of interdepen- 
dence. 

Another undesirable result of the wage system, of which 

statistical uniformity, even if entrepreneurs were able and disposed to tell the 
precise truth. 

The precariousness of profits, moreover, must be taken into account, inas- 
much as one bad year may wipe out the accumulations of several good 
business years. 

According to Leroy-Beaulieu, " experience proves that of every ten indus- 
trial or commercial entrepreneurs, two or three become bankrupt or are 
obliged to quit business ; five or six make just enough to live comfortably on 
the modest remuneration which they receive, but are unable to put aside 
much, if anything at all ; and only one, or two at the outside, really succeed 
in building up a fortune of any size." 

In 1902 the number of commercial failures in the United States {i.e. ex- 
cluding bank failures) reached 9,639. Since 1876, in fact, the number of 
annual failures has rarely fallen below 10,000, and has twice exceeded 15,000. 

1 We emphasize the condition "other things being equal." For it is 
evident that if productivity changes, and the total output of an enterprise is, 
let us say, doubled, it is possible for both wages and profits to be doubled 
simultaneously. It frequently happens that in new countries, where produc- 
tivity is greatest, wages and profits are both high. 

In a paper read before the American Economic Association in 1902, Pro- 






PROFIT-SHARING 643 

mention has already been made, is the nature of the wage 
contract, by which the laborer is confined to a purely passive 
part and has no direct interest in the success or failure of 
the enterprise with which he is connected. Workmen can- 
not be dissuaded from the idea that they have some claim to 
the wealth that issues from their hands. Nor can they be 
prevented from contemplating with bitterness the fact that 
successive generations of employers or stock-holders grow 
rich from the proceeds of factories or mines in which they — 
the laborers — have worked faithfully from generation to gen- 
eration without ever rising above a condition of apparently 
unchangeable poverty. It is true, perhaps, that they have 
been mere manual laborers, simple " hands " in the employ of 
their masters. But the great misfortune of our social organ- 
ization consists in just this fact that men may be regarded as 
mere instruments for other men. 1 

Profit-sharing is that method of remunerating labor which 
aims to do away with the above disadvantages of the wage 
system by making the wage-earner a kind of partner with the 

fessor J. B. Clark suggested the possibility of " labor organizations and trusts 
cooperating in such a way that the two consolidations together could impose 
on the public a monopolistic tax which neither could impose if it acted by 
itself. Workmen and employers are antagonists in one part of the distribu- 
tive process, and allies in another part. They may fight the employers 
fiercely enough when the issue at stake is how much of what is extorted 
from the public shall be made over to labor ; but in making the extortion the 
interests of employer and employed are in harmony." 

High wages do not necessarily mean low profits. It is quite probable that 
the employer will find it profitable to hire better-paid laborers or to increase 
the wages of those already in his employ, if only the increase of wages coin- 
cides with a sufficient increase of productivity to result in greater net profits. 
What the entrepreneur cares about is not the gross expenditure, but the total 
net profits. High-priced labor is not necessarily the dearest labor. (See 
page 494. ) 

1 Kant's first moral precept, called the "supreme practical principle," is 
as follows : " Remember at all times that we must regard the person of our 
neighbor as an end in itself, not as a means." It is evident that the present 
social organization, under which laborers in the employ of an entrepreneur 
are a means for his enrichment, is a violation of this elevated maxim. 



644 PRINCIPLES* OF POLITICAL ECONOMY 

employer. Profits, instead of falling exclusively to the 
latter, are divided, according to some system of sharing, 
between employer and employees, the workmen thus receiv- 
ing an addition to their regular wages if the enterprise has 
been successful. 

This arrangement has existed among fishermen from time 
immemorial. It may also be said that the " metayer " sys- 
tem in agriculture is simply a kind of profit-sharing. But 
the first experiment of this kind to achieve a noteworthy 
success was that made in 1842 by Leclaire, a Parisian house- 
painter. Leclaire came to the conclusion that there are in 
the common workman moral qualities to which the simple 
wage system makes slight appeal because it leaves the inspir- 
ing word " profit," with all its implications of ambition, zeal, 
and persistence, out of the workman's vocabulary. He be- 
lieved that the energy called forth by the prospect of profits 
would (by increasing the quantity of the product, by improv- 
ing its quality, by promoting care of implements and ma- 
chinery, and economy of materials, and by diminishing labor 
difficulties and the cost of superintendence) create a return 
beyond the average, a return not only sufficient to pay a 
bonus to the workman, but also to increase the profits of the 
employer. 

There are now probably over a hundred establishments in 
France which apply the system of profit-sharing. The most 
interesting of them is the largest department store in Paris, 
the Bon Marche, employing over three thousand persons and 
doing a business of $30,000, 000 a year. The results of the 
system have generally been less satisfactory in England and 
the United States, although many experiments along this 
line have been tried in both countries. 1 



1 For a more detailed discussion of the nature and history of profit-sharing, 
the student may refer to the following books : N. P. Gilman, " Profit-sharing 
between Employer and Employee" ; Sedley Taylor, " Profit-sharing between 
Capital and Labor" ; the article on Profit-sharing in Bliss's " Encyclopaedia 
of Social Reform." 



PROFIT-SHARING 645 

The fundamental idea of profit-sharing is susceptible of 
the most varied application, but the name is usually confined 
to those cases in which it is not simply a spontaneous gift on 
the part of the employer, but a contractual arrangement. 
In other words, profit-sharing must be set down as a part of 
the rales governing a business enterprise ; it must be granted 
to employees as a right, without distinction of persons, and 
subject only to conditions prescribed in advance. It usually 
provides that the distributed profits shall be shared among 
the employees in proportion to their respective wages and 
with some regard for the length of their service. 

The shares given to the laborers may either be paid to 
them in money or placed to their credit in a savings-bank 
or insurance association. In France, where profit-sharing 
appears to be most successful, the latter method prevails; 
the laborer's share of the profits is generally paid into a fund 
for providing insurance against sickness, disability, or death. 
This method has the merit of assuring the good use of the 
workman's supplementary remuneration ; but by postponing 
to some distant time the actual enjoyment of these advan- 
tages, it diminishes the good results that are usually attrib- 
uted to profit-sharing. 

The objects of profit-sharing, numerous from both the 
moral and economic point of view, are as follows : — 

(1) To reconcile labor and capital, and to increase the 
laborer's dignity by transforming him from a mere productive 
instrument into a partner. 

(2) To increase the productivity of labor by stimulating 
the workman's activity, furnishing him an incentive for 
faithful work, and leading him to feel a direct, personal 
interest in the success of the enterprise in which he is 
employed. 

(3) To increase the laborer's income by adding to his 
ordinary wages (which continue to be devoted to his running 
expenses) an annual dividend that can be saved or used to 
meet extraordinary expenses. 



646 PRINCIPLES OF POLITICAL ECONOMY 

(4) To avoid loss of employment by attaching the laborer 
more closely and more permanently to the enterprise in 
which he is employed. 

It must be admitted, however, that the great hopes aroused 
by this system have not been realized. The number of firms 
which practise profit-sharing tends in most countries rather 
to diminish than to increase. It has, moreover, met with 
little encouragement or approval either from socialists or 
from conservative economists. 

On the part of socialists, this is readily comprehensible. 
Socialists regard profits as a robbery, committed by employ- 
ers to the disadvantage of laborers. A supposed reform, 
they declare, which consists in righting such robbery by 
giving back a share of the booty to the victim, is the height 
of impertinence ! 

Conservative economists, without expressly condemning 
profit-sharing, hesitate to acknowledge its utility. Professor 
Leroy-Beaulieu ironically calls it a device for making the 
wage system more "palatable," and declares that laborers 
really have no right to a share in the profits, inasmuch as 
profits are due to no merit or exertion of theirs, but are ex- 
clusively the result of the entrepreneur's management and 
circumspection. 

This argument is valid if we hold that profits are the wages 
of invention and superintendence ; for the laborers take no 
part in either of these activities, and are therefore not 
entitled to share in their results. But if we maintain that 
profits, strictly speaking, are generally the result of a mo- 
nopoly-element of some sort (see page 625), it is only just 
that the laborers should participate in the advantages due 
to a monopoly which is useless without their help. Note 
especially that share-holding capitalists are supposed to be 
fully entitled to a proportionate part of the proceeds of an 
enterprise, although there can be no doubt that the profits 
resulting from a monopoly-element are due much less to 
their work than to that of the employees. 



OBJECTIONS TO PROFIT-SHARING 647 

Another serious objection which has been raised is that if 
the laborers share the profits, they should also share the losses; 
but as the latter is impracticable, the former is unjustifiable. 
This argument, however, is not conclusive. It goes without 
saying that if there are losses, the laborers will receive no 
profits. But is it equitable to go further than this, and 
reduce wages by the amount of the losses ? When the man- 
agers of an enterprise discover at the end of a business year 
that there has been a loss instead of a profit, is the interest 
due the capitalist for borrowed money reduced for this rea- 
son ? By no means ! Now the workman has just as much 
right to the stipulated wages as the capitalist has to the 
stipulated interest ; for the laborer also has furnished one of 
the requisites of production. As a matter of fact, however, 
if the business does not prosper, the workman's wages will 
probably be reduced, while the capitalist will continue to 
receive the same interest. The objection may still be raised 
that when an enterprise fails, the capitalist loses his capital, 
whereas the laborer does not. This is true simply because 
the laborer has no capital to lose. But he does lose his place 
and the means of earning a living ; and certainly this loss is 
quite as great as that experienced by the capitalist. Capital- 
ists and laborers have their own distinct risks, and there is 
no reason for confounding them. 1 

The institution of profit-sharing is not gaining much 
ground, because it is subject to the disfavor which now 
attaches to all forms of the wage system, to paternalism, 

1 The arguments of conservative, "liberal" economists against profit- 
sharing are stated with considerable detail by Leroy-Beaulieu in his Econ- 
omie Politique, Vol. II. Refer also to Hadley's " Economics," pages 373 ff. 

A summary of the case against profit-sharing, evidently from the stand- 
point of a more radical economist, may be found in Bliss's, " Encyclopaedia of 
Social Reform." Here the argument is presented that profit-sharing is unjust 
because it reduces the proportionate share of the laborers by leading them to 
create, by their greater activity, not only a bonus for themselves but also 
additional profit for the employer. It says, " If you, the worker, will work 
a little harder, we, the management, will give you a slight share of your in- 
creased earnings." 



6±8 PRINCIPLES OF POLITICAL ECONOMY 

to the industrial sovereignty of the employer, and, in fact, to 
every device which tends to strengthen the bonds between 
employer and employee. Labor and capital are each in quest 
of greater independence of the other. The prerequisite of 
profit-sharing, however, is a spirit of fellowship and friendly 
collaboration — the spirit that is every day becoming rarer. 
Laborers as a rule prefer such a system as "job contracts," 
to which we have already referred. 

Thus profit-sharing is a modification, an improvement, of 
the wage contract ; it is not the complete and perfect associa- 
tion of capital and labor, the laborers having neither any 
responsibility for the losses incurred, nor any share in the 
management. Profit-sharing may be transformed into the 
association or quasi-partnership of labor and capital, by con- 
verting the share allotted to the laborer into part-ownership 
of the enterprise ; in other words, by making the laborer a 
stock-holder. 1 This more radical variety of profit-sharing, 
which has been tried in a number of establishments, is some- 
times called industrial co-partnership, or labor co-partnership. 

V. Productive Cooperation 

A still more radical scheme is that which contemplates the 
abdication and gradual disappearance of the employer, by 
transferring all the stock of an enterprise to the laborers 
themselves. Thus profit-sharing is transformed into produc- 
tive cooperation. Industrial co-partnership may be regarded 
as the transition-stage between the two systems. The Le- 
claire establishment (to which we have referred), and the 
celebrated " Familistery " at Guise, founded by Godin, have 
gradually been transformed into societies for productive 

1 This transformation of the laborer into a stock-holder may be either 
elective or obligatory ; in the latter case the laborer's share in the profits 
becomes ipso facto a share of the stock. The latter method appears some- 
what autocratic ; but, unfortunately, experience shows that it is the sole effec- 
tual method of accomplishing the aim in view. The Familistery at Guise (in 
France) was built up by this method. 



PRODUCTIVE COOPERATION • 649 

cooperation. But societies for productive cooperation may 
also be formed spontaneously by groups of workmen them- 
selves, without" passing through these transitional stages. 

France is regarded as the classic land of institutions of this 
nature, and seems to have taken the first steps toward produc- 
tive cooperation. The first cooperative society for production 
was founded in 1834 by Buchez, a French publicist. At the 
close of the Revolution of 1848, the movement in favor of 
productive cooperation assumed great vigor, and more than 
two hundred labor societies for production were founded in 
France, particularly in Paris. But only four of them have 
survived. There was, however, a temporary recrudescence 
of the movement in 1866, and in recent years the number of 
these organizations has increased with considerable rapidity. 1 

In the United States, the first productive cooperative asso- 
ciation of which we have any record was the Boston Tailors' 
Associative Union, which was formed in 1849, but did not 
last long. The best known American cooperative enter- 
prises of a productive character are those among the coopers 
of Minneapolis. As early as 1868 the experiment of renting 
a small shop and selling the product directly to the mills was 
tried by a few journeymen coopers ; they allowed themselves 
the ordinary rate of wages, calculated on the piece system, 
and then divided the profits in proportion to the work 
done. Successful instances of productive cooperation may 
be found among boot and shoe companies. Cooperative 
creameries and dairies have also had considerable develop- 
ment in the United States. 2 

The obstacles encountered by productive cooperative socie- 
ties are numerous, and account only too well for their want 

1 In 1902 there were in France 323 cooperative societies for production, 
some of which were very prosperous. 

The Report of the Thirty-fourth Annual Cooperative Congress (1902) 
recorded 136 "productive societies" in Great Britain; in addition, there 
were thirty cooperative societies for farming. 

2 Consult Professor F. Parsons's article in the Arena for August, 1903. 



650 PRINCIPLES OF POLITICAL ECONOMY 

of success and for their comparatively short duration in 
many cases. 

(1) The first and greatest obstacle consists in the lack of 
economic education among the working classes. Laborers are 
rarely able to find among their own numbers men capable of 
managing a business enterprise. Again, assuming that such 
men can be found, the laborers do not know enough to 
choose them and keep them as managers ; the very superiority 
of such men frequently leads to their exclusion. Further- 
more, even supposing that such men are chosen as man- 
agers, the rank and file of laborers are rarely willing to give 
the managers a share of the proceeds proportionate to the 
value of their services, the superiority of intellectual over 
manual labor not being sufficiently understood. 

(2) The second drawback is the want of capital. We 
know very well that although it may be possible to eliminate 
the capitalist from productive enterprises, it is, at all events, 
impossible to get along without capital ; and large-scale 
production demands capital in larger and larger amounts. 
(See page 135.) How can mere laborers obtain the amount 
of capital requisite for successful production ? By putting 
aside a few cents day by day ? This, to be sure, is possible, 
and it has been done in the case of a few businesses con- 
ducted after the methods of small-scale industry ; but -it is 
accomplished only at the cost of heroic sacrifices, and is alto- 
gether exceptional. Ought the government to lend them the 
requisite funds ? This experiment was tried in France in 1848, 
but the $400,000 distributed for this purpose among various 
productive societies brought little success to these organiza- 
tions. Nothing is easier than to waste money that is freely __ 
received, especially when the government is the donor. 1 

1 The socialists maintain that all successful enterprises must be equipped 
with the best appliances, — machinery, etc., — and that these appliances cost 
large sums of money. The workers, however, do not possess sufficient money, 
and for this reason they cannot carry on their own productive enterprises. 
All that is needed, therefore, in order that they shall prosper, independently 



[REACTIONARY EFFECTS OF COOPERATION 651 

We do not, however, regard this difficulty as insur- 
mountable. Carefully organized and firmly established 
workmen's productive associations, when once they have 
given proof of their economic vitality, would easily be able 
to borrow all the capital they might require. They could 
do this either through the agency of cooperative banks (such 
as are already in existence in Germany, Italy, and France) or 
by seeking help from other cooperative organizations (such 
as distributive cooperative societies) having considerable cap- 
ital at their disposal. (See pages 396 and 677.) 

(3) The third danger, finally, is that they tend to re- 
establish the very institutions which they seek to eliminate, 
namely, the class of employers and the wage system. This 
shows how difficult it is to modify the organization of 
society. Too often, when cooperative associations have 
proved successful, they close their ranks, refuse to accept 
new members, and engage hired workmen (i.e. wage-earners), 
— thus becoming nothing more than stock companies or part- 
nerships made up of small employers. 1 This is the principal 
objection that socialists raise against productive cooperation, 
and we must admit that it is well founded. On the other 
hand, would it not require exceptional disinterestedness on 

of capitalist and entrepreneur, is the requisite capital. Ferdinand Lassalle 
proposed that the government should meet this difficulty by advancing several 
millions of capital to associations of workmen who would guarantee to make 
good its value at the close of the period of production. Lassalle believed 
that productive associations thus aided by the state could drive private busi- 
nesses out of the field and gradually lead to a reorganization of society on a 
collectivistic basis. 

1 The Cooperative Barrel Company of Minneapolis, for example, regarded 
as a noteworthy example of cooperative production, had a number of em- 
ployees working for wages. 

The same was true of the Rochdale Pioneers, in England. Even now some 
productive works of the English Cooperative Wholesale Society are carried on 
by hired laborers that have no share in either profits or management. 

One of the Parisian cooperative societies for production (that of the spectacle- 
makers) has fifty members and twelve hundred employees working for wages, 
and the value of a share of its stock has increased from $60 to $10,000. 
Clearly, such a society is cooperative only in name. 



652 PRINCIPLES OF POLITICAL ECONOMY 

the part of those workmen who have succeeded by dint of 
privations and perseverance in founding a prosperous bus- 
iness, if we should expect them to admit on a footing of 
equality all those who wish to enter at the eleventh hour, 
when the difficult task of organization has already been 
accomplished ? 

Yet there is reason to hope that these obstacles in the way 
of productive cooperation may be avoided by first traversing 
a stage of preparation ; this preparation could be provided in 
these ways : — 

(1) By profit-sharing. Sometimes the employer will con- 
sent to withdraw gradually from the leadership of an enter- 
prise by enabling the laborers to become partners during his 
lifetime, and his successors after his death. The most cele- 
brated examples of this method are furnished by M. Godin 
in the Familistery at Guise, and by Madame Boucicaut in the 
case of the Bon Marclie, a Parisian department store. 

(2) By trades unions. Several productive associations 
in France owe their origin to trades unions. Again, the 
Sovereigns of Industry and the Knights of Labor, two organ- 
izations of workingmen in the United States, founded a 
number of enterprises for cooperative production. When 
trades unions take this step, they do not set to work all the 
members of the organization simultaneously, — having nei- 
ther capital nor markets sufficient to do this, — but only 
those members of the union who happen from time to time 
to want employment. 

(3) By consumers' cooperative societies. When these 
societies are sufficiently developed, and united into larger 
federations, they can undertake cooperative production, and 
furnish this new departure with the three requisites of suc- 
cess : capital, which they are able to lend ; experienced men 
suitable for managers ; and regular customers, consisting of 
the consumers' societies themselves. These three elements, 
be it noted, are precisely those which have hitherto been 
wanting. Some consumers' cooperative societies in England, 



FEDERALISM AND INDIVIDUALISM 653 

where a number of prosperous productive societies have 
already been established, pursue this policy. 

It is by the last-named method that productive coopera- 
tion may achieve greater successes in the future. In this 
connection it is important to note the difference between 
the federalist™ and the individualistic systems — as they are 
designated in England. 

Under the federalists system, consumers' cooperative so- 
cieties, either separately (when they are strong enough) or in 
groups, establish workshops or factories for producing, on 
their own account, some of the articles they require. In this 
case the laborers in their employ are simply wage-earners, 
and in no wise co-proprietors of the concern ; usually, more- 
over, they have no share in the profits, these being reserved 
exclusively for the members. 1 There has been much oppo- 
sition to this system, on the ground that the laborers should 
have a share both in the profits and in the ownership of the 
workshop or factory. This step has already been taken in 
the case of the Scottish Wholesale Society. 

Under the individualistic system, which had better be 
called the autonomous system, the first steps are taken by 
the laborers themselves, who form independent productive 
societies ; the consumers' societies only lend them the capital, 
provide a market, and protect them from competition. 2 

As the conclusion of this chapter, and of the whole book 
on Distribution, we venture to assert that there is a paral- 
lelism between the political and the economic evolution of 

1 It goes without saying that if these employees are members of the con- 
sumers' society which employs them, they participate, as such, in the profits 
of the factory or shop. 

2 In England these independent productive societies numbered about one 
hundred in 1901, with a capital of over $7,000,000 and an output valued at 
nearly $15,000,000. 

The productive enterprises founded directly by the consumers' societies, 
either separately or through wholesale societies, produced $36,000,000 worth 
of goods, or more than twice as much as the preceding societies. (Consult 
the Book on Consumption for a further treatment of consumers' societies.) 



654 PRINCIPLES OF POLITICAL ECONOMY 

society. Political evolution embraces the three successive 
stages of absolute monarchy, constitutional monarchy, and 
republic. There are many sound reasons for believing that 
economic evolution follows step by step along correspond- 
ing lines, and includes, first, the stage of coercive organi- 
zation (slavery) ; second, the rule of the employer (the 
wage system) ; third, the rule of the employer modified by 
profit-sharing and certain concessions to the laborers with 
regard both to the ownership and management of business 
enterprises ; and, finally, cooperative production. There are, 
however, equally good reasons for believing that the advent 
of democracy in the domain of economic life will be slower 
and more difficult, and will involve even more disappoint- 
ments, than in the political sphere. 1 

1 John Stuart Mill regarded independent productive cooperation as the 
means of solving the social problem. 

Despite Lassalle's advocacy of it, collectivists are now openly opposed to 
productive cooperation. Productive societies, although they aim to abolish 
the wage system, retain the individual ownership of capital as the basis of 
their organization, inasmuch as they expressly endeavor to make the work- 
men co-proprietors of the instruments of production. Collectivism, on the 
contrary, aims to "socialize" the instruments of production, i.e. to with- 
draw them from individual ownership even by the laborers themselves. This 
antagonism was clearly shown in the recent strike at Carmaux, in France, 
when the proposal was made to start a glass-works belonging to the glass- 
workers themselves. The socialists protested that the works should belong 
to the entire laboring class ; and their plan was ultimately adopted. 

Liberal economists regard productive cooperation with the same ironical 
attitude of condescension as profit-sharing and cooperation in general. As 
they do not admit either the desirability or the possibility of abolishing the 
wage system, they cannot admit the possibility of getting along without a 
class of employers. 



BOOK V. CONSUMPTION 

I. The Nature and Laws of Consumption 

To consume wealth is to utilize it for the satisfaction of 
our wants, to apply it to the uses and purposes for which it 
was produced. Consumption is, therefore, the ultimate aim 
of all economic activity, - — of production, exchange, and dis- 
tribution. Its importance is far greater than is indicated by 
the meagre space devoted to it in most treatises on political 
economy. It is, moreover, a field of investigation rich in 
curious facts, but very largely unexplored. A greater 
knowledge of this field is likely some day to transform 
economic science. Logically, economics should begin with 
the study of consumption. Did we not begin this .volume 
with a study of wants and utility, — matters which clearly 
belong to the domain of consumption ? 

The tendency of modern economic theory, especially of 
investigations concerning the subjective nature of value, has 
been in the direction of giving added importance to con- 
sumption as a necessary part of the edifice of economic 
science. The so-called Austrian school studies consumption 
and value from the standpoint of final utility (see pages 59 
and 182) and emphasizes the principle that in the consump- 
tion of wealth the maximum of gratification is reached when 
the final utilities of the last increments consumed are equal. 
Everybody consciously or unconsciously employs his income 
and makes his purchases according to this law. It is a law 
so important that we shall devote some space to a more 
detailed explanation of it. 

As we have already said, the purpose of economic activity 
is human welfare, human gratification ; or, to be more strictly 

655 



656 PRINCIPLES OF POLITICAL ECONOMY 

accurate, its ultimate purpose is either to produce positive 
pleasure or to avoid pain. Men seek to minimize pain and 
to maximize pleasure. But these two aims — to minimize 
pain and to maximize pleasure — are in a sense antagonistic. 
More wealth means more pleasure, and if there were no 
effort or pain involved in the acquisition of wealth, our con- 
sumption of it would be limited only by satiety. 1 But in 
the example of the man drawing water from a well (see 
pages 55 and 82) we saw that whereas the utility of each 
successive bucket decreases, the effort or pain necessary to 
obtain it increases because of growing fatigue. Most of the 
commodities that we consume are, to be sure, not the direct 
product of our own labor, but are procured by the use of 
money. Therefore it seems strange to speak of the pain or 
effort necessary to produce them. Yet this expression is 
perfectly correct, viewed in its deeper significance. For, in 
the first place, it is by labor that we get the money; and 
when we exchange this money for goods we are really 
exchanging our labor and effort (see page 212) for the 
labor and effort of others; and, in the second place, when- 
ever we spend money for one commodity in preference to 
another we are really sacrificing that other commodity, which 
we might have purchased. If under given circumstances we 
buy oranges rather than peaches, we do this because oranges 
afford a greater gratification than we can obtain from 
peaches. 

Concrete examples will make this matter clearer. And in 
order that the factors of the problem of consumption may be 
clearly distinguished from each other, let us begin with the 
simplest possible example and subsequently introduce the 
elements that further complicate the problem. 

1 It is, perhaps, necessary to point out that the term " pain," as we have 
used it and as it is coming to be used very generally among economists, 
merely means the opposite of pleasure. There are objections to its use in 
this sense, because of its association with disease or other abnormal physical 
conditions. The term simply means disutility. 



DECREASING UTILITIES 



657 



Take the consumption of water, of which there is an 
abundant supply. Let us suppose that it costs absolutely 
nothing. What, in such a case, would be the limit to our 
consumption of it? Clearly we should consume just as 
much as afforded us any gratification whatever. 1 A certain 
amount would be indispensable. Still more would, up to a 
certain point, be highly agreeable. Additional quantities 
would decrease rapidly in utility, down to the point where 
we should have absolutely no use for more water. If, now, 
the acquisition or employment of each portion involves some 
effort, — say the time and effort of turning a spigot and carry- 
ing the water away, — we will cease consuming water at pre- 
cisely the point where the utility is still somewhat greater 
than the effort, but beyond which it would not be " worth 
our while " to get more of it. This condition of affairs may 
be represented by the following diagram : — 



ABCDEFGR X 



The line AX represents the amount of the commodity; 
that is to say, in this case, the supply of water. The lines 

1 This statement requires some qualification. The limit to consumption is 
fixed not only by the point of satiety, and, as we shall point out later, by the 
actual " cost " of the commodity, but also by the time at our disposal if we 
intend to consume any other goods, and by the fact that the continued con- 
sumption of this commodity may be incompatible in kind with other pleasures 
from different sources. A man will cease consuming water before further 
increments possess no utility, if it is his intention to consume other goods 
that provide a greater utility-surplus than additional increments of water. To 
consume more water will decrease a man's capacity for consuming other 
goods and will always take a certain amount of his time (which is one of his 
valuable possessions). 



658 PRINCIPLES OF POLITICAL ECONOMY 

A 1, B 2, (73, etc., represent the utility of successive portions 
used. The consumer in this illustration will use eight units 
because the utility of the eighth unit is still a positive 
quantity. 

As a matter of fact, we consume as much water as we 
think we have any use for. But water is an exceptional 
commodity as regards supply. Most commodities are not 
obtainable in sufficient quantity to satisfy entirely the wants 
of all mankind. Take, for example, suits of clothes. Would 
not any of us willingly accept more suits of clothes if he 
might obtain as many as he could use ? Why, then, do we 
not possess more? Because they cost money. And, as our 
supply of money is limited, we cannot obtain additional suits 
without spending money that might be used for the purchase 
of some other commodity of which our present supply is also 
insufficient to satisfy our wants entirely. We are certainly 
willing to pay a large sum of money to obtain at least one 
suit ; for this is absolutely necessary. We probably will 
not hesitate to pay the price for a second suit. The money 
that we must sacrifice to obtain it would, to be sure, buy 
something else which we may desire keenly ; yet our desire 
to be well clothed outweighs our longing to possess the 
object that we might otherwise purchase with the cost of 
the second suit. There are, as a matter of fact, persons 
who buy not merely one or two suits, but half a dozen, 
before they feel that a greater gratification may be procured 
by employing their money in some other way than in buying 
an additional suit. This fact may be represented in the form 
of a diagram (see page 659), as follows : — 

Here AX, as before, represents the supply of the com- 
modity in question, and the lines A 1, i?2, etc., indicate 
the utility of each successive suit of clothes for a given 
consumer. MN is the cost line, and the part of each line 
A\, B% etc., which falls below MN indicates the cost of 
each suit. If suits cost absolutely nothing, this consumer 
would find satisfactory employment for nine of them ; but 



WHAT DETERMINES CONSUMPTION? 



659 



in view of the fact that they cost the amount represented 
by AM, he will purchase only five. The cost of the sixth 



M 



-n 



suit is greater than the utility of the money which would 
have to be paid for it. The point of marginal utility comes 
after the fifth suit, but before the sixth. 1 

In the world of actual business we have a choice among 
almost innumerable uses of our money, and we are con- 
stantly called upon to make some decision with regard to 
the relative utilities of a multitude of commodities. The 
problem, then, is : How much of each commodity shall we 
consume? This depends partly on our desire for them, 
that is to say, on the utility or gratification which their 
possession involves ; and partly on the cost (effort, pain, 
or sacrifice) necessary under given conditions to obtain 
them. 

The principles which govern our choice of the kinds of 
goods and the amounts thereof that we shall consume may be 
made clear by the following example: Take four commodi- 
ties that are offered for sale on the market. Let us desig- 
nate them as A, B, G 7 , and D. The first increment of A 
yields ten units of gratification ; that of B, eight units ; that 

1 If instead of a series of vertical lines of decreasing length we indicate 
the decline of utility by a curved line running downward, the point of mar- 
ginal utility will be the intersection of this curve with the cost line. It is of 
course possible that the cost may not remain the same, as assumed in the 
diagram given above. In agriculture the line of costs would be a rising 
curve, not a straight line ; in manufactures it would, for a while at least, 
be a falling curve. Consult Marshall's "Principles of Economics," Vol. I, 
pp. 441 ff. 



660 PRINCIPLES OF POLITICAL ECONOMY 

of (7, six; and that of i>, three. Successive increments of 
each commodity will of course afford less gratification. The 
successive increments of A, including the first, will probably 
represent a decreasing scale, — 10, 9, 8, 7, etc., units of 
utility. The successive increments of B represent utilities 
of 8, 7, 6, etc. The increments of commodity represent 
utilities of 6, 5, 4, etc., units. The increments of D, finally, 
possess utilities of 3, 2, 1, 0. This scale of diminishing 
utilities may be arranged in this form : — 

A B B 

10 
9 

8 8 

7 7 

6 6 6 

5 5 5 

4 4. 4 

3 3 3 3 

2 2 2 2 

1111 



If we assume, for convenience, that there are only these 
four commodities from which to choose, it is obvious that 
two increments of A will be desired before there will be any 
thought of applying our purchasing power to the acquisition 
of any of the other commodities. When four increments of 
A have been consumed, and two of B, there will be room for 
hesitation with regard to the advisability of beginning to con- 
sume some of O. If each increment represents what can be 
secured by one hour's labor, and if A stands for food, B for 
clothing, O for shelter, and D for ornament, the scale would 
express the following facts : That two hours' labor would be 
devoted to the production (or securing possession) of food 
before any other commodity could be considered ; that the 
third hour would produce an equal utility whether devoted 



PRINCIPLES OP CONSUMPTION 661 

to clothing or food, so that half of it would probably be 
given to each; that only after six hours' labor, of which four 
had been given to food and two to clothing, could sufficient 
pleasure be derived from shelter to furnish an induce- 
ment to .devote a portion of the time to the task of secur- 
ing shelter. The corresponding numbers in the different 
columns represent different utilities, equal in amount and 
equally difficult of acquisition. If each separate desire could 
be completely satisfied, it would be found that ten incre- 
ments of A, eight of B, six of C, and three of D had been 
consumed. 1 

From this discussion two fundamental principles may be 
deduced concerning the order and quantities in which goods 
will be consumed : (1) We will first procure and consume 
those goods which yield the greatest surplus of utility over 
costs. (2) We will endeavor to reach a maximum of grati- 
fication by making the final utilities of the last increments of 
all commodities as nearly equal as possible. If a man drinks 
ten glasses of beer and smokes ten cigars a day, this means 
that the gratification afforded by the tenth glass of beer is 
subjectively equal to that of the tenth cigar. For if the 
tenth cigar did not afford a pleasure equal to the last glass 
of beer, he would evidently prefer smoking one cigar less 
and drinking one more glass of beer ; for thus the total 
gratification would be increased. 2 

Before leaving this aspect of the problem of consumption 
we must point out that although in the management of our 
expenses, and particularly in large-scale transactions, we con- 
stantly make careful estimates of the comparative utility and 
the comparative cost of commodities, yet seldom can judg- 
ments be made w T ith the exactness that the above discussion 

1 A considerable part of this last illustration is taken from Dr. Devine's 
little book on Economics (Macmillan, 1898). 

2 A further discussion of the principles of consumption in their economic 
bearing will be found in: Patten, "The Consumption of Wealth" (Philadel- 
phia, 1889); E. T. Devine, "Economics" (New York, 1898). 



662 



PRINCIPLES OF POLITICAL ECONOMY 



appears to take for granted. Some authorities (despite Pro- 
fessor Jevons' able defence of the use of mathematics in his 
" Theory of Political Economy ") deny that it is possible to 
express such subjective matters as desire and utility in quan- 
titative terms. It is objected moreover that men are not so 
much creatures of reason as creatures of habit or impulse 
(both of which oftentimes prompt irrational conduct). 
Wants are often aroused by advertisements, show-windows, 
and circumstances of an accidental nature. There are, 
furthermore, cases in which the utility of additional units 
of a commodity is not necessarily less than that of the first 
increment — cases which are indicated by the proverb : 
" Appetite comes by eating." 

Yet it must also be pointed out that there is a striking 
uniformity in the habits of consumption of large classes of 
people. An investigation made by the United States Com- 
missioner of Labor (Report for 1891) gave the following 
results concerning the percentage of expenditure for "nor- 
mal " families : — 



Object of 
Expenditure 


Income 
under $200 


Income 

$300 and 

under $400 


Income 

$500 and 

under $600 


Income 

$700 and 

under $S00 


Income 

$900 and 

under $1000 


Income 

$1200 and 

over 




Per Cent 


Per Cent 


Per Cent 


Per Cent 


Per Cent 


Per Cent 


Food . . . 


49.64 


45.59 


43.84 


38.89 


34.34 


28.63 


Rent . . . 


15.48 


14.98 


15.15 


15.60 


14.96 


12.59 


Clothing 


12.82 


14.14 


15.27 


16.33 


16.84 


15.71 


Fuel . . . 


7.07 


6.04 


5.63 


4.42 


4.00 


2.57 


Lighting 


1.01 


.98 


.97 


.88 


.74 


.45 


All other 














purposes . 


13.98 


18.27 


19.14 


23.88 


29.12 


40.05 



It is evident that the scientific value of such tables as 
these depends largely on the number of cases studied and 
the accuracy of the data employed. Careful investigations 
of this sort, however, have been made by Le Play (1855), 
Ducpetiaux (1851), and Dr. Engel (1857), and subsequently 



THE MEANING OF CONSUMPTION 663 

by a number of other investigators. The general results 
seem in the main to agree with the inferences drawn by Dr. 
Engel, viz. : — 

(1) As the income of a family increases, a smaller per- 
centage is expended for food. 

(2) As the income of a family increases, the expenditure 
for clothing remains approximately the same. 

(3) In all the cases investigated, the percentage of expen- 
diture for rent, fuel, and light, was nearly the same. 

(4) As the income increases, a constantly growing per- 
centage is expended for education, health, recreation, amuse- 
ments, etc. 1 

The word " consumption " may give rise to errors which we 
must be careful to avoid. In the first place, it must not be 
supposed that all consumption necessarily implies destruction. 
This is indeed true in the case of some things ; such wants as 
food and warmth can be satisfied only by the destruction of 
food and fuel. To utilize bread, i.e. to change it into flesh 
and blood, we must eat it ; to warm ourselves with coal we 
are obliged to burn it, i.e. to reduce it to smoke and ashes. 2 

1 Mr. G. B. Waldron, in "A Handbook on Currency and Wealth" (New 
York, 1896), page 100, gives the following estimates for the consumption of 
wealth in the United States in 1890 : Necessaries, .$6,100,000,000, of which 
$3,305,000,000 was for food, $1,233,000,000 for clothing, $319,000,000 for 
furniture, $475,000,000 for fuel and lighting, and $768,000,000 for other nec- 
essaries. For luxuries the total expenditure was $3,584,000,000, of which 
$900,000,000 was for liquors, $450,000,000 for tobacco, and $2,234,000,000 
for other luxuries. For capitalistic uses, $3,717,000,000; of which $2,- 
436,000,000 was to renew old capital, $1,196,000,000 to increase the sup- 
ply of capital, and $85,000,000 sent out of the country in payment for the 
use of foreign capital. In addition to these items, the permanent govern- 
ment expenses, — aside from salaries and other payments, which figure as 
consumed by other persons, —were $240,000,000. Probably no two authori- 
ties would agree on the amount which is annually withdrawn from con- 
sumption in order to maintain capital, and to make good the wastes of time 
and use. 

2 Economically, combustion is tantamount to destruction, but it is of 
course impossible to destroy matter itself. Just as man in production is 
powerless really to create anything (see page 73), he is also unable really to 



664 PRINCIPLES OF POLITICAL ECONOMY 

But there are fortunately many other wants the satisfac- 
tion of which does not involve the destruction of wealth. 
The statue of the Venus of Milo will provide assthetic enjoy- 
ment for all generations of mankind without thereby losing 
an atom of its substance ; its power to provide pleasure may 
be destroyed by vandals, never by "consumers." Undoubt- 
edly time itself is a destroyer of nearly all things except 
coins, bronze objects, and statues ; and even these do not 
entirely escape "the tooth of time." Tempus edax rerum. 
But we must take care not to confound the effects of time 
with those of consumption. As a matter of fact, we strive 
to make things last as long as possible. If we could make all 
things indestructible (clothes, houses, furniture, etc.), they 
would not be worse, but better, adapted to economic pur- 
poses ; for in such an event they could be utilized perpetu- 
ally, and we should have attained the ideal of consumption. 

On the other hand, we must not confound consumption 
with production. It is true that the production of wealth in- 
volves the constant consumption of raw material, coal, etc. ; 
economists generally designate this consumption as repro- 
ductive consumption, to distinguish it from the consumption 
which serves for the direct satisfaction of our wants, and 
which is called unproductive consumption. But only the 
latter is consumption proper, and the name should be con- 
fined to it. The act of sowing seed, for example, must not 
be regarded as an act of consumption, but as the type of pro- 
ductive activity ; to designate it as consumption, and to 
apply the same term to two acts so opposite as sowing wheat 

destroy anything. The chemist finds that not an atom of the " consumed " 
object has been lost. 

Even when consumption results in the destruction of utility, it is often 
possible by means of economical methods and devices to make use of the res- 
idues of consumption. Paper is made of old rags, slag and swill are used 
to make fertilizer, coal dust is employed in the manufacture of dyes and 
perfumes. The possibility of using residual substances, even in small quan- 
tities, is one of the reasons for the superiority of large productive plants. 
In an absolutely perfect economy, no utility would be lost, and the consump- 
tion of wealth would be simply its metamorphosis. 



KINDS OF CONSUMPTION 6Q5 

and eating it, can be explained only by the paucity and 
inaccuracy of economic terminology. 

Without doubt, the economic process forms a complete cir- 
cuit. Man produces in order to consume, and he must con- 
sume in order to produce. This is so true that some 
economists have actually regarded sowing as an act of con- 
sumption, while others (such as Jevons) regard eating as an 
act of production, because they consider the food of the 
workman the very type of capital. Yet if we want to 
reason clearly in this matter we must draw a line some- 
where. Man is both the beginning and the end of all 
economic processes. But man does not consume in order to 
produce ; he produces in order to consume. The purpose 
of wealth is to be consumed, that is, to satisfy human wants. 
Consumption is not the first but the last stage of the eco- 
nomic process. 1 At all previous stages, wealth is still being 
produced. 

Consumption is of two kinds : — 

First, it is direct or immediate — when it satisfies present 
wants. As under present economic conditions most of what 
we consume is purchased from others, this kind of consump- 
tion is effected by means of the use of money and is called 
spending. 

Secondly, it is postponed — when it is intended to provide 
for the satisfaction of future wants. Since under present 
conditions value is stored in the form of money, this opera- 
tion is called saving. 

We shall study each of these kinds of consumption in turn. 
But before doing so, we must say a word about another cele- 
brated problem due to the unfortunate circumstance that the 
gratification of the most important human want — the need 
of food — involves the destruction of wealth. 

1 " A fertilizer is useful to enrich a meadow ; the meadow is useful to pro- 
duce hay ; hay is useful to feed horses ; and horses are useful to do service. 
From the fertilizer to the man are several steps, but it is the final step which 
makes all the others count." —Gregory, " Political Economy." 



666 PRINCIPLES OF POLITICAL ECONOMY 

II. Whether Production will always keep pace with 

Consumption 

Malthus, an English economist, in a formula that has 
since acquired great celebrity, affirmed that the population 
tends to increase more rapidly than the means of subsistence. 1 
Far from anticipating that production would keep up with 
consumption, he declared that production would always lag 
behind — far behind — the demands of consumption. He 
concluded that the equilibrium could be brought about only 
by a frequent reduction of the population, effected by means 
of wars, epidemics, famines, pauperism, prostitution, and 
plagues, all of which, regarded from a higher point of view, 
Malthus considers really providential. 2 

Malthus, however, hoped that in the future men would 
learn to prevent the intervention of these "immediate 
checks " upon population and make them unnecessary by 

1 In an illustration which many writers have erroneously regarded as 
intended to be taken literally, Malthus says that the population increases in a 
geometrical progression, while the food-supply increases in an arithmetical 
progression : — 

Population increases thus : 1 : 2 : 4 : 8 : 16 : 32 : 64 : 128 : 256. 

Subsistence increases thus : 1:2:3:4: 5: 6: 7: 8: 9. 
The average period in which the population could be doubled Malthus 
estimated as twenty-five years. He therefore concluded that : "In two cen- 
turies the population would be to the means of subsistence as 256 to 9 ; in 
three centuries it would be as 4096 to 13 ; and in two thousand years the 
difference would be almost incalculable." 

" In this supposition no limits whatever are placed to the produce of the 
earth. It may increase forever and be greater than any assignable quantity ; 
yet still the power of population being in every period so much superior, the 
increase of the human species can only be kept down to the level of the 
means of subsistence by the constant operation of the strong law of necessity, 
acting as a check upon the greater power." 

2 These evils are providential, according to Malthus, not only because they 
maintain the equilibrium of production and consumption but also because 
they exterminate the weak and the incapable, and thus contribute to perfect- 
ing the human race. It is known that the work of Malthus prompted Darwin 
to undertake his investigation of the evolution of species ; Darwin himself 
tells us so. 



MALTHUS ON POPULATION 667 

voluntarily limiting the number of their offspring. To ac- 
complish this Malthus advised them to use moral restraint, 
i.e. to marry only when they possess sufficient resources to 
support children, and, once married, to have only as many 
children as they can properly provide for. 

A century has elapsed since the publication of this remark- 
able doctrine, and experience has not yet justified the pessi- 
mistic prophecies of its author. 1 On the contrary, in almost 
all countries, whether we consider new nations like the 
United States or old nations like France, wealth has in- 
creased more rapidly than population. To-day our princi- 
pal anxiety is of quite the inverse nature. Markets are 
now so encumbered with manufactured and agricultural prod- 
ucts that governments have been obliged to raise barriers 
of customs duties against the influx of foreign goods; the 
problem is how to find a market for products, rather than 
how to produce sufficient goods to consume. 

The enormous and growing excess of production over con- 
sumption during recent years may of course be due to causes 
that will not recur, — such as the cultivation of virgin land 
in new countries, and the great cheapening of transportation 
by the use of steam. It is, after all, perfectly evident that 
the earth cannot provide food for an unlimited number of 
people; the law of diminishing returns will sooner or later 
give rise to a serious problem of population. 

No speculation concerning the economic future of mankind 
can ever be anything more than what Nitti cleverly calls 
a sort of demographic eschatology without scientific value. 
Yet the following considerations are perhaps of a nature to 
reassure us concerning the economic destiny of our race : — 

(1) Statistics prove that the birth-rate is lower among the 
rich than among the poor, and that the birth-rate tends to 
decrease with the groivth of prosperity . The rise of a multi- 
tude of new wants probably diminishes the intensity of 
sexual appetite, which, next to food, is the principal desire 

1 See page 11, note. 



668 PRINCIPLES OF POLITICAL ECONOMY 

of the poorer classes. It is therefore not unlikely that the 
increase of wealth among all classes will result in a decrease 
in the birth-rate. Indeed, such a decrease is already percep- 
tible in almost all countries. 

(2) Statistics also appear to show that the birth-rate is 
lower in democratic communities than in others. Among the 
native-born population of the United States, and, strangely 
enough, in Australia also, the birth-rate has fallen as low 
as in France. Perhaps the cause of this lies in the fact 
that in such communities as these the opportunities for social 
advancement are considerably curtailed whenever a person 
is hampered by a large family. Dumont calls this fact the 
law of capillarity. It influences women as well as men. The 
woman's rights movement, which is simply one aspect of 
modern democratic thought, tends to diminish the impor- 
tance of the natural function of women as wives and mothers, 
by opening up new pursuits and new social functions. 

(3) Biology teaches that in general the fecundity of a 
species is inversely proportionate to the development of the 
individual, the inferior animals being much more prolific 
than the superior animals, especially man. As this law seems 
to be due to a sort of physiological antagonism or incompati- 
bility between sexual activity and cerebral activity, it is 
reasonable to hope that the fecundity of the human race will 
diminish in proportion to the intellectual and moral develop- 
ment of individuals, especially of women. 1 

(4) The physiological laws of the variety, limitation, and 
substitution of wants (see pages 40 ff.) suggest the possi- 
bility of satisfying an increasing number of wants ; for 
although nature provides us with only a limited quantity of 
each kind of wealth, it is easy to conceive of an unlimited 
number of new wants and new combinations of wants, so that 
the possibilities of our development in this direction are lim- 
itless. The need for food, for example, will of course never 

1 Consult "The Evolution of Sex," by Patrick Geddes, Chap. XX, and 

Nitti, " Population." . 



THE FOOD SUPPLY 669 

be replaced by another want, but the need for a particular 
kind of food may always be replaced by the need for some 
other kind of food. If men had to live on wheat alone, there 
would sooner or later not be enough of it ; but as they are 
acquiring the habit of eating less of it and consuming in its 
stead an increasing variety of other aliments, and as new 
varieties of food are constantly being invented, there is no 
reason for thinking that we shall ever reach the limit of our 
food supply. 



CHAPTER I — SPENDING 
I. Whether spending helps Business 

We hear nothing more frequently than the statement that 
" spending promotes business." Hence public opinion is very 
indulgent, even sympathetic, toward all expenditure, even 
though it partakes of wastefulness. A man may break all 
the things he cares to, provided he pays for them. Innumer- 
able moralists and dramatists have pitilessly ridiculed the 
miser, while making almost a hero of the spendthrift. The 
man who saves is little loved by his neighbors, and incurs 
the risk of being regarded as a public enemy ; whereas the 
man who spends his money, even though he squanders it in 
riotous living, generally enjoys a considerable degree of 
popularity. One may admit that the spendthrift or the 
drunkard acts foolishly by emptying his purse or ruining 
his health; in which case, so much the worse for him. But 
at all events, his misfortune is the advantage of others, — 
of the merchants, laborers, and producers who receive his 
money and profit thereby. 

Certainly money that is spent, i.e. used in making pur- 
chases, benefits those that receive it. It enables them to 
continue and expand their business. But Bastiat long ago 
pointed out that this money would have been expended 
anyway, for the simple reason that money can be used in 
no other way, save for hoarding ; and not only is the 
amount of wealth that is hoarded comparatively small, but 
it is not destined to be hoarded forever. Spending is 
simply a transfer of money, the removal of wealth from 
one branch of production to another ; it results in the appli- 
cation of labor and 'capital to other branches of production. 

670 



FALLACIES KEGAKDING SPENDING 671 

It must not be supposed that spending or consumption is a 
matter of indifference from the economic point of view. On 
the contrary, it is the most important of all economic opera- 
tions. Spending is beneficial when it turns capital and labor 
from relatively unproductive channels into those that are 
more productive ; if it does the opposite, it is economically 
harmful. By means of spending, the rich man, even though 
he lives entirely on his income, exerts a great influence on 
productive activity. The productive factors, — land, labor, 
and capital, — are in his control. Like the centurion in the 
gospel, when he says to one "Come," he comes, and to 
another " Go," he goes. This commanding power is precisely 
what imposes especial responsibilities and unusual duties. 

But we are mistaken when we believe : — 

(1) That because only spending encourages production, 
spending is more useful than saving. 

We shall see that saving also leads to consumption, — to 
spending. Money that is saved is always ultimately spent 
for some purpose. Only, instead of being spent by its 
owner, it is, perhaps, spent by those who received it from 
him as borrowers, as laborers, or as sellers of goods. What 
does it matter, from the standpoint of social production, 
whether money be spent by me or by another person ? 

The above fallacy is due to the fact that consumption is 
the purpose, justification, and ultimate goal of all production. 
When men cease to consume, they will also cease to pro- 
duce; when they no longer need bread to eat, they will cease 
sowing wheat. But to argue that therefore consumption is 
the efficient cause of production, or that consumption neces- 
sarily means production, is to deduce an absurdity from an 
axiomatic truth. The three factors of production are already 
familiar to us,— land, labor, and capital, — and it is perfectly 
evident that consumption cannot create or increase any one 
of them. Nay, consumption constantly tends to undo the 
work of these factors and to decrease the supply which they 
store up. If the supply of accumulated wealth were increased 



672 PRINCIPLES OF POLITICAL ECONOMY 

by a constant influx of commodities so that the more we 
took from it the more would be added, the error which con- 
sists in believing that increased consumption means increased 
production might be pardonable. But such is not the case. 
No one would dare maintain that the more apples we pick, 
the more will grow ; or that the more fish we catch, the 
more the sea will provide ; or that the more wood we burn, 
the thicker the forest will grow. 

(2) That spending is always an advantage, even though 
it involves the useless destruction of wealth. 

This popular misconception is defended by the assertion 
that the destruction of wealth, although it may necessitate 
replacing the wealth that was destroyed, furnishes additional 
work for laborers and new opportunities for capitalists. Many 
people, after reading of a fire, console themselves with the 
thought that it will furnish builders with work. Undoubtedly, 
the money that is spent for any purpose whatsoever is not lost ; 
but the house that is burnt is really lost, and there is no 
gain to compensate for the loss. Builders, to be sure, may 
rejoice, but not society as a whole. The money (or the capi- 
tal, labor, and material) that is used to build another house 
would have been used anyway. The fire has necessitated 
doing again what was already done once. There has, in 
fact, been an expenditure of labor and material sufficient to 
build two houses. Yet because of the fire we have but one ; 
the other is irretrievably lost. 1 

To show the absurdity of this argument, moreover, let us 
carry it further. If it be based on sound reasoning, we must 
regret that things are not destroyed ten times as quickly 
and easily as they are : that clothes last longer than a week, 
that houses are not destroyed every ten years by means of 
earthquakes, that war does not more frequently reduce our 
national wealth, and that we do not die sooner, — since the 
rapid succession of human generations also involves a great 
consumption of wealth! 

1 Consult Bastiat's celebrated essay on "La Vitre Cassee." 



THE NATURE OF LUXURY 673 

II. Luxury 

In its ordinary use the word " luxury " means the gratifica- 
tion of a superfluous want. This definition does not imply 
the condemnation of luxury, for, as Voltaire said, the super- 
fluous is exceedingly necessary. We may properly wish that 
everybody, even the poorest people, might have a little of 
the superfluous, and consequently a little luxury. Nature 
herself furnishes examples of magnificent and sometimes 
extravagant luxury, in the way she decorates the petals of 
flowers, the wings of butterflies, and the bodies of small 
insects. Again, history teaches us that every new want was 
at first regarded as superfluous. New wants, in truth, are 
superfluous ; because, first, no one has previously felt them, 
and, second, because to satisfy them probably means con- 
siderable labor, inasmuch as the work of providing for them 
is new and therefore somewhat difficult. The linen we wear, 
for instance, is now regarded as an absolutely indispensable 
part of our apparel ; to say that a man is reduced to his last 
shirt, is a proverbial way of expressing his dire poverty. 
There have been epochs, however, when a shirt was regarded 
unquestionably as an object of luxury, and fit for a royal 
present. The same may be said of thousands of other objects. 
If, therefore, we had been prevailed upon from the beginning 
to accept the ascetic doctrine, and suppressed all desire for 
luxuries, we should have prevented the development of 
all those wants that constitute civilization, and we should 
to-day still be living as our ancestors lived in the stone 
age. 1 

Luxury is condemnable only when it degenerates into 
wastefulness. But how shall we recognize wastefulness? 
This is an interesting, although difficult, question. 

1 Forks, watches, bicycles, are examples of such objects as these, originally- 
regarded as luxuries. As for forks, it is by no means certain that they are 
preferable to the chop-sticks of the Chinese and Japanese, which are better 
adapted to the need of cleanliness and elegance, and cost much less. 



674 PRINCIPLES OF POLITICAL ECONOMY 

In answering it, public opinion generally considers only 
the amount spent. But the economist must abandon this 
point of view entirely. When a person spends thousands 
of dollars to purchase bric-a-brac, or when he pays his cook 
the salary of a general, he may be culpable from the private 
point of view of his own family; but from the economic stand- 
point of society as a whole, the money spent is simply trans- 
ferred from his pockets to those of the persons whose goods 
or services he buys. 

From the point of view of society, the sole criterion is not 
the amount of money spent, but the quantity of wealth or labor 
consumed in the satisfaction of a given want. It must always 
be borne in mind that the sum total of existing wealth is 
insufficient to satisfy even the elementary wants of the 
greater part of mankind, and that the productive forces 
which provide and increase our stock of wealth, — land, 
labor, and capital, — are all limited in quantity. Whence it 
is evidently an unquestionable duty not to apply to the 
satisfaction of a superfluous want too large a share of our 
productive forces or of the wealth at our disposal. All this is 
a problem of proportion. Unjustifiable luxury or prodigality 
consists in a disproportion between the amount of social labor 
consumed, and the degree of individual satisfaction obtained. 
A few examples will make this clear. 

The desire for flowers, entirely unknown to our ancestors, 
is certainly a luxury in the proper sense of the word, inas- 
much as flowers are by no means necessities ; yet they are a 
charming, elevating luxury, and one that is accessible even 
to the poor. But when we decorate our drawing-rooms with 
orchids brought from distant countries at an expense of 
thousands of dollars and perhaps at the cost of human life, 
or with blue dahlias raised in hot-houses which required 
more coal than would have provided warmth for ten families 
during the winter, this kind of luxury falls under the second 
definition that we have given. 

For a lady to wear a dress that is elegantly made, is not 



JUSTIFIABLE LUXURY 675 

necessarily objectionable, although the dress may have cost 
several hundred dollars; for as we have said, we are 
not concerned with the sum spent (that simply passes 
from one person to another) but with the amount of 
material or labor involved. It is not probable that this 
dress required more cloth or much more labor than an ordi- 
nary dress. But if, on the other hand, a lady has her dress 
covered with several yards of lace, representing many years 
of a working-woman's toil, we may rightfully raise objec- 
tions on both moral and economic grounds. 1 

It is perhaps justifiable for an English nobleman to spend 
several millions in the purchase of paintings for his private 
gallery, — although it would be better to give them to a public 
museum. But when, like the rough barons of the Middle 
Ages, he consumes enough meat and wine at his meal to pro- 
vide for twenty ordinary mortals, or when, in order to offer 
the pleasures of the chase to his guests, he converts into 
hunting grounds land that would have produced food for 
hundreds of human beings, his luxury is not justifiable. 

In all these examples the consumer of the luxury does not 
contribute to social progress. 2 

It must not be supposed that the deplorable effects of 
luxury which wastes labor and wealth are imputable only to 
the rich. There are luxuries among the poor which are no 
less detrimental to society. The sums that the poor spend 
daily for drink amount to much more than the value of the 
pearl which Cleopatra threw into her wine-cup, and which 

1 M. Leroy-Beaulieu says that perhaps a man has saved millions in order 
that his wife may wear laces and jewellery. This is possible. But if he has 
earned these millions only to employ them in this manner, of what use has he 
been to society ? 

2 The pro and con of the matter have been discussed ever since antiquity. 
For the arguments against luxury, consult Laveleye's "Le Luxe " ; for the 
opposite argument, Leroy-Beaulieu' s "Traite" d'Economie Politique." M. 
Baudrillart has given a mass of information in four volumes entitled " His- 
toire du Luxe." It is well known that in Antiquity and in the Middle Ages 
(and some of our colonies) sumptuary laws were passed, prohibiting expendi- 
ture for luxury. Cf. Roscher's « Political Economy. 1 ' 



676 PRINCIPLES OF POLITICAL ECONOMY 

is supposed to have cost 300,000 sesterces. The queen, more- 
over, was not poisoned by it. 1 

What should be said of art ? Is it a luxury ? This is in- 
deed the general opinion, and economists are somewhat at a 
loss how to justify art. If, however, we recall the defini- 
tion we have given of luxury, we shall see that it implies no 
condemnation of art, even though we regard it from the 

1 Drunkenness is a terrible form of luxury, more ruinous than any other, 
at least for the poorer classes of society — most other luxuries being inacces- 
sible to them. According to the United States Census of 1900, the capital 
invested in the production of all kinds of alcoholic liquors was over $457,- 
000,000, and the annual product was valued at about $340,000,000. The 
materials used were valued at $70,000,000, and the average number of per- 
sons employed the whole census year was over 52,000. The total consumption 
in this country for the year 1900, taking into account exports and imports, 
was 1,322,166,685 gallons, or 17.3 gallons per capita. It is probable that not 
more than 1 per cent of this was consumed in the arts, manufactures, and 
for medicinal purposes. Carroll D. Wright estimates that the 161,483 places 
or establishments in the United States which pay a federal tax to engage in 
the traffic have a capital of nearly $960,000,000, in the hands of 191,000 pro- 
prietors or firm members, with nearly 242,000 employees. 

But the direct economic expenditure of labor and capital is insignificant 
when we consider the incalculable loss through disease, incapacity for work, 
insanity, crime, and suicide due to drink. Intemperance is one of the 
gravest social problems and has been made the subject of numerous investi- 
gations. Probably the two most important remedies proposed are : — 

(1) Private initiative and propaganda by means of temperance societies, 
such as have succeeded in reducing the use of alcohol in the United States and 
England. In Sweden and Norway, private societies with state assistance 
have taken the place of the ordinary saloon-keepers; there are no saloons 
near factories, and liquors are not sold by the glass, but only by the quart. 

(2) Government intervention, limiting the number of saloons or forbidding 
the rum-traffic entirely. Sometimes the government itself, as in Eussia and 
Switzerland, has a monopoly of the trade in alcohol, in order to restrict its 
sale or at least to prevent adulteration. In three states of the Union the 
laws prohibit the sale of intoxicating drinks — Kansas, Maine, and North 
Dakota. (New Hampshire and Vermont have recently abandoned prohibi- 
tion in favor of local option.) In most of the states each local commu- 
nity decides the question whether it will permit the sale or not ; this is called 
local option. The Norwegian or Gothenburg system of monopoly under gov- 
ernment control has been adopted in a modified form in South Carolina. 

(See Carroll D. Wright's "Practical Sociology," 2d edition, Chapter 23.) 



ART AND LUXURY 677 

purely economic point of view. Genuine art does not require 
an amount of labor disproportionate to the result. Quite 
the contrary ! A piece of marble and a chisel, a square yard 
or more of canvas and a few tubes of paint, added to a few 
hours of labor, are sufficient to provide exquisite enjoyment 
that may be repeated throughout innumerable generations of 
mankind. If a lover of art spends half a million for one of 
Raphael's paintings, this may be a folly from the purely per- 
sonal point of view. But from the social point of view the 
question is : Did the painting cost the artist an amount of 
labor or of capital disproportionate to the pleasure it pro- 
vides ? Certainly not. Art is characterized by the produc- 
tion of great effects through very simple means ; and this is 
precisely the contrary of luxury. 1 

III. Consumers' Associations 

Men generally do not like to deprive themselves of any- 
thing useful ; they would fain find some means of reducing 
their expenses and " putting aside " a larger share of their 
income, without reducing the quantity or lowering the quality 
of the objects they consume. This apparent impossibility 
is accomplished by various kinds of associations, some of 
which are exceedingly important. 

(1) The common household. When several persons join 
together in the use of one house and garden, or for the com- 
mon enjoyment of the same imperishable goods, or for the 
common hire of a cook, they can certainly obtain the same 
gratification with less expense. The economy of life in con- 
vents, military barracks, and boarding-houses is proof enough. 

This economy is due to the same causes that make large- 
scale production cheaper than isolated, small-scale procluc- 

1 In another sense, however, it may be said that art is a luxury. Every 
important art always presupposes the waste of a great quantity of productive 
energy, inasmuch as there is only one successful artist for a hundred whose 
time and labor are spent uselessly. But the same is true of all careers that 
appeal to human vanity, — politics, for example. 



678 PRINCIPLES OF POLITICAL ECONOMY 

tion, — causes which (see page 161) find a similar appli- 
cation with reference to consumption. For this reason 
communists have held that the present method of living in 
small, separate family groups, is extremely wasteful of wealth 
and energy. Each separate family now has, or endeavors to 
have, its own house, its own garden, its own domestic ser- 
vants, its own horses and carriages, although it would be to 
every one's infinite advantage to constitute larger groups of 
consumers which could make better use of all their oppor- 
tunities and economize an enormous amount of wealth and 
labor. Consider the great waste of food and fuel alone 
when each of the innumerable small families in the same town 
provides its own meals, buys its cooking utensils, stoves, etc., 
and hires a cook. Would it not be infinitely better, cheaper, 
and simpler, to group a score or more families in a large, 
well-equipped apartment-house, having but one set of cook- 
ing utensils, a better equipment than any separate family 
could have, and employing enough expert servants to do the 
work better than before ? It is maintained that this would 
be an almost incalculable saving of energy and wealth, a great 
step forward, and an unquestionable benefit for humanity as 
a whole. No one has developed this scheme more brill- 
iantly or in greater detail than Fourier, in describing his 
" phalanstery," 

The system of living together, although it offers the incon- 
testable advantage of effecting a great saving, unfortunately 
suppresses family life by destroying the home, and the home 
has ever been one of the most important wants of man. 
Human nature has always found something repugnant in 
group-life and even in " boarding " in common. Nor must 
we lose sight of the fact that the real aim of wealth is to pro- 
vide enjoyment. Ought we to sacrifice all the blessings of 
family intimacy, the happiness and the moral influences of 
home life, simply in order to save part of our expenditure ? 

(2) Purchase in common. Without binding ourselves to 
a life in common, or forming the habit of sleeping under the 



COOPERATIVE PURCHASE 679 

same roof and eating at the same table, many of the advan- 
tages of living together may be realized, at least in part, by 
cooperative associations in which a number of persons unite 
to make their purchases jointly, and thus obtain the advan- 
tages of buying at wholesale rates. Robert Owen appears to 
have been the inventor of this kind of association. But the 
development of cooperative consumption is most closely con- 
nected with the history of the celebrated Rochdale Equitable 
Pioneers, founded in 1844. More than one-fifth of the whole 
British population now purchases its goods in part or entirely at 
the stores of cooperative associations. The members of these 
associations meet annually in a congress, publish periodicals 
and newspapers, and constitute a power in the nation. Most 
of the local associations are grouped into a large federation, 
called the Cooperative Union, which has its own wholesale 
society, transacting an enormous amount of business each 
year. The English Wholesale Society in 1902 sold 192,000,- 
000 worth of goods, and the Scottish Wholesale Society sold 
over 130,000,000 worth ; about 120,000,000 of the goods thus 
sold were manufactured by the wholesale societies themselves. 
These societies, which own a fleet of merchant vessels that go 
to all parts of the world to purchase goods, do not limit 
themselves entirely to commerce, but engage in production 
and banking. 1 Cooperative consumption (or, as it is some- 
times called, distributive cooperation) is carried on in many 

1 See the annual reports of the Congress of the Cooperative Union, pub- 
lished by the secretary, J. C. Gray. An interesting article on cooperation 
in Italy may be found in the 1902 Annual of the Cooperative Wholesale So- 
cieties, published at Manchester. A brief but fairly complete account of 
cooperation and kindred movements for social betterment may be found in 
Gide's report on "Economie Sociale " at the Paris Exposition of 1900 
(Paris, Imprimerie Nationale, 1902). Consult also : Hubert Valleroux, » La 
Cooperation," Paris, 1904 ; and the articles by Professor F. Parsons in the 
Arena for July and August, 1903. 

The well-known Belgian cooperative society, "Vooruit," of Ghent, de- 
votes the greater part of its profits to socialistic propaganda, and the share of 
profits distributed to the members is not paid in cash, but in coupons, good 
for merchandise at the cooperative stores. 



680 PRINCIPLES OF POLITICAL ECONOMY 

other countries, but usually on a smaller scale than in Great 
Britain. There are probably about 200 retail " cooperative 
stores " in the United States, where the whole cooperative 
movement is now developing with surprising rapidity. 

Most consumers' associations are patterned after the so- 
called Rochdale type, which is characterized by these fea- 
tures: — (<z) Sales for cash only; (b) sale not at the cost 
price, but at the customary retail price, thus bringing a profit ; 
(c) the distribution of a large part of profits among mem- 
bers, according to the amount of purchases they have made 
(and not according to the capital they have contributed, for 
which a fixed rate of interest is paid) ; (c?) the use of a cer- 
tain part of the profits for social and educational purposes. 

The direct advantages of these associations are as fol- 
lows : — 

(1) An economy in the cost of living. When cooperative 
societies sell goods at cost, the saving is obvious and imme- 
diate. When the Rochdale system is applied, the profits are 
returned at the end of each year or six months, and thus the 
members may be regarded as saving money unconsciously. 

(2) Putting a stop to the adulteration of goods, and thus 
providing more healthful and more abundant food. 

(3) The abolition of advertising and all forms of commer- 
cial falsehood and trickery, thus raising the ethical standard 
of business life. 

But should the cooperative movement continue to develop 
in the future as rapidly as it has during the past half century, 
its ultimate effects will amount to nothing less than a trans- 
formation of economic society, characterized especially by 
the following features : — 

(1) The gradual elimination of traders and the class of 
business intermediaries. 

(2) To the extent that consumers' societies devote them- 
selves to the production of whatever goods they require, 
there will be a decrease in the number and importance of 
individual concerns and of stock companies, and a falling off 



THE COST OF A HOME 681 

in the profits and dividends which these concerns and com- 
panies are able to pay. 

(3) A decrease in the number of large fortunes and an 
increase in the number of small ones built up by cooperative 
saving. Cooperation will accomplish this by doing away 
with the causes to which large incomes and great fortunes 
are due. 

(4) The perfect adjustment of production and distribution, 
and the suppression of crises and of the loss of work by large 
numbers of laborers affected by these crises. Cooperation 
will accomplish this eminently desirable result simply by 
producing only the amount of goods required by the organ- 
ized consumers. 

IV. The Cost of Housing 

Of all expenditures, that for shelter is entitled to special 
consideration, not only because it tends to absorb an increas- 
ing share of the family income, but also because the home is, 
from the social point of view, perhaps the most important 
human want. 

In antiquity, the custom of renting a home was unknown ; 

the home was not only the place of residence, but also the 

altar of the household gods, and every person, rich or poor, 

had a home of his own. To-day, however, the economic 

conditions of life compel men to live like nomads ; they 

usually do not stay where they were born, and they live for 

the most part in hired apartments. All the social, economic, 

and political influences that prompt men to agglomerate in 

large cities, — the tendency toward centralized administration, 

production on a large scale, the growth of railroads, city 

amusements and dissipations, — have caused a steady increase 

in the cost of renting houses and apartments. This is very 

profitable to urban property-owners, but detrimental to the 

general public. 1 

1 In 1790 there were six cities in the United States with a total population 
of 131,472, or 3.4 per cent of the entire population ; in 1850 there were 85 



682 PRINCIPLES OF POLITICAL ECONOMY 

This state of affairs is not particularly disturbing for the 
rich, but it is a serious matter for the poor. Higher rents, 
which oblige the working people to congregate in miserable 
quarters, produce most deplorable results from the hygienic 
as well as the moral point of view. Most of the vices that 
afflict the working population, — the loosening of family ties, 
the habit of frequenting rumshops, the debauchery of 
children, and even such terrible social evils as high death- 
rates and epidemics, — are due especially to this cause. It 
is, moreover, impossible to conceive of normal human exist- 
ence without a certain degree of home comfort. 

The only effectual remedy for such evils would be a ces- 
sation of the growth of cities, and a return to rural life on 
the part of those who have abandoned it. But there are no 
signs pointing to such a reaction. In many of our large 
cities, however, we may observe the beginning of a centrifu- 
gal movement that is carrying the people away from the 
congested parts of the city. Modern methods of cheap and 
rapid local transportation have led people to choose homes 
not in the centres of cities, but in the outskirts and the sub- 
urban districts ; the central parts are almost entirely taken 
up by business houses and offices. Suburban homes are not 
only cheaper but more healthful. 1 

Meanwhile, another remedy — and a most practical one — 
consists in the construction of houses built to be rented to 
workmen, or built with the intention that they shall some 
day become the laborers' property by the payment of small 
instalments. Six somewhat different schemes have been 
suggested for accomplishing this : — 

(1) Cooperative building societies formed by the workers 

cities with a total of nearly 3,000,000, or 12J per cent of the whole popula- 
tion. The census of 1900 shows 545 cities (i.e. incorporated places with a 
population of at least 8000) having a total of nearly 25,000,000 inhabitants, 
or 33.1 per cent of the entire population. 

1 Some interesting figures, showing that the problem of the " slums " (the 
dense, unhealthful city quarters of the laboring population) is becoming less 
acute, are given in Wright's "Practical Sociology" (2d ed., 1902). 



SCHEMES FOR LABORERS* HOMES 683 

themselves. (We have given an account of building* and 
loan associations on page 397.) These societies are numer- 
ous in England and the United States. In the city of Phila- 
delphia, sometimes called the city of homes, these societies 
have built more than 60,000 houses, each inhabited by a 
working-man's family. 

(2) Associations of a half-philanthropic, half-financial 
nature, which construct comfortable, salubrious homes for 
workmen, and which are satisfied with only a small profit 
on their investment, — say 3 or 4 per cent. Several large 
tenement houses in New York have been built upon this 
plan recently. 1 

(3) The establishment of perpetual funds to be used for 
the construction of working-men's homes. The rent of these 
homes is then employed to construct still others, so that the 
results of the scheme increase by a sort of geometrical pro- 
gression. An example of this is the celebrated Peabody 
Fund in London, which is thirty years old, and which now 
provides homes for 20,000 tenants, living in 5073 apartments. 

(4) The construction of houses by cooperative consumers' 
societies for their own members. As these societies aim to 
provide their members with all the necessaries of life, why 
should they not also provide homes? English cooperative 
societies have already built more than 24,000. 

(5) The construction of houses by municipalities. Berne, 
Glasgow, and other large cities have undertaken to do this. 
In Germany, the central government gives bounties to socie- 
ties for building working-men's homes. 2 

1 This category should also include laborers' houses built by large em- 
ployers or manufacturing concerns for their employees in the vicinity of 
their place of work. Many concerns which are situated far from the large 
cities are obliged to do this to provide lodging for their workers. These 
houses are usually rented for a merely nominal sum. Socialists and parti- 
sans of labor detest this arrangement, because the consequent dependence 
of the laborer on his employer, they hold, deprives him of his independence 
and reduces him practically to serfdom. 

2 The collectivists would not only require the state or the city government 
to build houses for the workers, but to take possession (with or without 



684 PRINCIPLES OF POLITICAL ECONOMY 

(6) The hire, by philanthropic societies, of homes already 
in existence, with a view to improving and snb-letting them 
to laborers on favorable terms ; and providing, so to speak, 
for the economic, aesthetic, and moral education of those 
that inhabit them. This system, which is closely associated 
with the name of Miss Octavia Hill, who has applied it in 
London for twenty-five years, is designed primarily for the 
poorest classes of society. Miss Hill has pertinently re- 
marked that there is no use attempting to make the poor the 
owners or even the tenants of model homes unless we have pre- 
viously changed their habits of life, given them the sense of 
cleanliness and comfort, and taught them to appreciate a home. 

The first five schemes mentioned above aim either to make 
the workman the owner of his home, or, merely a tenant. 
Which aim is the better? The English and American 
laborer much prefers having a home of his own ; the French 
workman cares less about it. The ownership of a house, in 
spite of its advantages from the moral and economic point 
of view, involves certain inconveniences for the workman. 
When he is tied down to a given locality, it is difficult, if 
not impossible, for him to move from one place to another, 
and to offer his labor in the market where it may be in 
greatest demand ; he is more dependent on his employer 
than is otherwise the case. 

indemnification) of all houses, and permit the people to live in them either 
at cost or gratuitously. This would be the system of nationalization applied 
to urban property. 

In generalizing this system of nationalization, the following difficulties 
present themselves : — 

(a) If the government furnished homes free of charge, it would probably 
soon be bankrupt. This arrangement, moreover, would probably aggravate 
the present unhealthful tendency toward the too rapid growth of cities. For 
if the government undertook to provide a home for everybody in the cities, 
few people would be willing to live in the country. 

(6) If, on the other hand, the government obliged its tenants to pay 
their rent punctually, and should attempt to expulse them in case of their 
failure to pay, the government would soon become fully as unpopular as the 
present property-owners, and would find it difficult to collect rents. 



ABSENTEEISM 685 

V. Absenteeism 

The term absenteeism is used to designate the custom 
among wealthy property-owners of living abroad, or at least 
away from their estates. This custom gives rise to the 
question whether undesirable consequences for the home 
country, and, vice versa, desirable effects for the places in 
which they live, do not result therefrom. It is an extremely 
complex question, and we can here indicate only some of its 
main features. 

From the moral point of view absenteeism is severely con- 
demned. But it is necessary to make a distinction. The 
condemnation is well founded as regards landed proprietors, 
because the possession of land is, as we have seen, a social 
function ; and a social function cannot properly be performed 
by proxy. We may even set up the universal rule that all 
social duties should be performed personally, and not by 
proxy. Property in land, justifiable upon grounds of public 
utility, has no just foundation whatever when the owner does 
nothing but collect rents, and lives at a distance ; his very 
absence proves that he leads the life of a parasite. More- 
over, aside from this theoretical consideration, experience has 
frequently demonstrated (in Ireland, for example) that the 
absenteeism of landowners who delegate their powers to 
agents or middlemen involves the ruin both of the farmers 
and of agriculture itself. 

But the problem of absenteeism is a somewhat different one 
in the case of capitalists ; their social function consists in the 
accumulation and investment of capital, and does not bind 
them to one place more closely than to another. In fact, a 
certain degree of cosmopolitanism is quite useful in helping 
one to invest money most intelligently and to keep track of 
one's investments. 

From the purely economic point of view, absenteeism is 
condemned because, it is said, the man who spends his money 
away from home does not enable his neighbors to profit by 



686 PRINCIPLES OF POLITICAL ECONOMY 

his expenditure, but helps foreigners or strangers to profit 
thereby. The sojourn of rich foreigners in Switzerland, in 
Italy, at Paris, and on the Riviera, is regarded as a source of 
wealth to the population of these places. Now it is evident 
that if the residence of rich foreigners means profit to the 
places in which they reside, their absence from home must 
involve an equal loss to their native countries. What a man 
spends abroad cannot be spent or invested at home. 

It may, however, be held that when English travellers 
in Switzerland, for example, spend two million dollars in 
that country, they consume Swiss products of a value exactly 
equivalent to the sum spent, and that this English money 
will be used later for the purchase of goods imported into 
Switzerland from England (according to the economic law ex- 
plained on page 301, note 1) ; so that after all there has been 
simply an exchange of English goods for Swiss goods. This 
objection, however, is not valid. The sum paid by English 
residents is probably much greater than the value of the 
goods or services received in exchange for it, for the follow- 
ing two reasons : — (a) Foreigners generally pay more for 
things than they are really worth. Although the practice 
is unfair, it is well known that in nearly all places fre- 
quented by foreigners there are two prices for goods, — one 
price for natives and one for foreign purchasers. (6) Very 
often the foreigner pays for the use of wealth that is not 
really of a consumable or destructible nature. When a 
traveller, in renting a villa for the season, or taking a guide 
for the day, buys the right to enjoy a beautiful climate, to 
breathe pure air, or to have a view of the sea or the moun- 
tains, he deducts nothing from the wealth of the country ; he 
pays a rent similar to the rent paid to every one having the 
monopoly of a natural advantage. Why, indeed, should not 
the scenery of Switzerland, the azure seas of the Riviera, the 
waterfalls of Norway, and the historical associations which 
cling to the cities of Italy, represent wealth for these coun- 
tries quite as truly as coal mines or petroleum wells ? 



ABSENTEEISM 687 

The same thing, moreover, is true for individuals. If I 
have some sort of natural curiosity, a grotto, or a ruin, in 
my garden, and I ask each visitor to pay a quarter to see it, 
obviously my income is increased by what these visitors pay 
for admission. 

Classical economists may reply that the ultimate result of 
such expenditure is merely a displacement of money, its 
simple transfer from one country, or one person, to another; 
we have seen with what superb indifference these economists 
regard the increase or decrease of the quantity of money. 
But have we not frequently had occasion to note that the 
amount of money in a country is not a matter of indiffer- 
ence ? (See pages 222 and 298.) 



CHAPTER II — SAVING 
I. The Conditions Necessary for Saving 

Saving, we have already said, is really one kind of con- 
sumption; it is postponed consumption. Man, instead of 
satisfying only his immediate needs, thinks of his fnture 
wants and " puts something aside " for to-morrow, or for his 
old age, or for his children. 

In ordinary speech, and even in the language of econo- 
mists, saving is generally allied with investment, i.e. the 
productive employment of savings. But the two acts are 
entirely independent. Saving is a distinct operation with a 
purpose of its own; viz., to provide for the satisfaction of 
future wants. Although popular opinion regards it with 
little favor and calls it hoarding, saving is an economic act of 
considerable importance. Even some animals, of which the 
ant offers a familiar example, practise saving (but not invest- 
ment). Like work and the division of labor, it is a variety 
of economic activity not confined to mankind, but familiar 
to animals also ; it may be called a natural economic func- 
tion. Nevertheless, we must not believe that saving is spon- 
taneous and takes place of its own accord. On the contrary, 
several by no means simple conditions must be fulfilled before 
saving can take place among mankind. 

(1) As a subjective condition to saving there must be a 
certain degree of foresight, i.e. the peculiar faculty which 
consists in feeling a future want as though it were present. 
The man who intends to save puts two wants in the balance, 
— & present want which he must forego, and a future want 
for which he desires to provide. The present want, for in- 
stance, is the desire to consume more food ; the future want, 
perhaps, is a desire to make provision for a comfortable old 

688 



THE NATURE OF SAVING 689 

age. On the one hand, a man is restrained from saving by 
the thought of the present sacrifice that it involves. On the 
other hand, he is influenced by the advantage that he expects 
to receive from saving. His choice oscillates between two 
opposing influences, and according to the strength of the one 
or the other his conduct is determined. (See page 82.) 
Note that the present want is a reality ; it is felt now. But 
the future want is largely an abstraction, a product of the 
imagination. Saving therefore presupposes a certain degree 
of mental development and the presence of those intellectual 
qualities which make abstract thought possible. And these 
qualities, we must remember, are primarily the result of 
advanced civilization. 

Our education, as well as the present organization of society, 
accustom us to think constantly of the future. The habit of 
constantly looking forward is a distinctive characteristic of 
modern civilization. Scientists seek to penetrate the secrets 
of future ages ; statesmen look anxiously forward to the mor- 
row ; business men try to gauge the future standing of the 
market, and involve themselves in transactions the outcome 
of which will long remain unknown; shopkeepers prepare to 
meet the obligations that fall due months and years hence. 
All of us are more or less concerned for the future and attempt 
to make some reckoning of what this unknown quantity is. 
The intellectual effort which such an attitude involves is im- 
possible for the savage, who is conscious only of present needs ; 
who, as Montesquieu declared, " cuts down the tree to get 
the fruit." Such intellectual effort, moreover, is difficult 
even for those of our own fellow-citizens whose social con- 
dition and whose mental habits resemble those of primitive 
mankind, and who live, as they do, from hand to mouth. 
Savages, children, paupers, vagabonds, are all improvident, 
and for precisely the same reasons. 

(2) As an objective condition to saving, it must be possible 
to preserve the commodity saved. Under ordinary, natural cir- 
cumstances, this condition is rarely fulfilled. There are few 



690 PRINCIPLES OF POLITICAL ECONOMY 

objects of consumption the use of which can be postponed 
without danger of deterioration or total loss of utility and 
value. Things often deteriorate quite as rapidly when they 
are not in use as when they are used. Furniture and clothes 
wear out and fade ; linen tears and grows yellow, even in the 
closet ; iron rusts ; food decays or is devoured by insects ; 
even wine, after improving with years, later loses its quality. 
The grain stored away by the ant (although grain is easily 
stored and partly for this reason is an important kind of 
wealth), and the nuts saved by squirrels, cannot be saved 
longer than a year except with great care. 

Until money, or at least some precious metal, was used as 
a store of value, saving was very narrowly limited by the 
lack of a suitable object to save. The invention of money 
facilitated saving, and subsequently made possible the mar- 
vellous enterprises of modern times. Gold and silver are, 
as we have seen, nearly the only immutable substances. 
Although, to be sure, they are not themselves objects of 
consumption, they may at any time be exchanged for objects 
of consumption. Instead of trying to store up perishable 
objects, a man (who wants to save) exchanges these objects 
for money, puts the money in a safe place, and at any sub- 
sequent time he or his descendants may exchange this money 
for whatever kind of wealth they choose. Even when men 
discover a treasure that has been hidden for centuries, this 
treasure may be regarded as a power to consume, the exer- 
cise of which has been long postponed, but which is finally 
employed by the fortunate finders. 

The invention of credit, furthermore, provided mankind 
with an instrument for saving that is more marvellous even 
than money. Here, let us say, is a man with a fortune of 
$1000, which, if he chooses, he may consume at once. But 
he prefers to postpone its consumption. The fact that he 
does not now care to make use of his right to consume does 
not destroy or curtail this right ; its exercise is simply post- 
poned. At any time in the future he or his descendants 



SAVINGS INSTITUTIONS 691 

still possess the right to consume an equivalent amount of 
wealth. They cannot, of course, consume the wealth that 
was originally created, for that has been consumed by others. 

(3) Before a man can save, his labor must yield more than 
the necessaries of life. It is often unwise to ignore future 
wants and care only for the present ; but it is madness, on 
the other hand, to sacrifice the present for the future. To 
run the risk of dying now of hunger, for fear of famishing ten 
or twenty years hence, is worse than miserly; it is, in fact, one 
of the traits that make avarice so ridiculous and contempt- 
ible. We shall see that to make too great present sacrifices 
for the sake of future consumption is not only contrary to the 
interest of the individual, but also that of society as a whole. 
(See page 695.) 

The man who has just enough to live cannot have any sur- 
plus for saving ; for him it would be detrimental and even 
dangerous to save, since saving would mean to forego some 
essential want. But for the man who has a superabundance 
of wealth, saving can hardly be regarded as a sacrifice ; 1 it 
may even become a necessity, since man's power to consume 
is limited, even though he be a second Gargantua. Our 
wants and even our desires have a limit, which nature has 
indicated by the feeling of satiety. (See page 43.) 

(4) Finally, there must be institutions or devices for facili- 
tating saving, or at least for making it possible. These 
means or institutions may be nothing more than barns for 
saving wheat, cellars for storing wine, or safes for keeping 
money. Modern society, however, has done more than this 

1 Economists have sometimes emphasized the sacrifice involved in sav- 
ing and called it abstinence. Senior regards abstinence as the source of 
capital. This theory exaggerates the moral value of saving. Socialists, on 
the other hand, ridicule this so-called abstinence and the privations which 
the capitalist is supposed to undergo. Lassalle, particularly, attacked this 
doctrine with keen satire. Both the advocates of the theory and its socialistic 
opponents have an ultimate object in view : the former, to justify the reward 
of capital ; the latter, to discredit it. In reality both are right in part ; the 
sacrifice involved in saving varies from infinity to zero. 



692 PRINCIPLES OF POLITICAL ECONOMY 

to encourage and facilitate saving, and has created various 
institutions which we shall discuss in the following section. 1 

II. Institutions to Facilitate Saving 

In all civilized countries there are many ingenious institu- 
tions and devices for facilitating saving. 

(1) The best known of these institutions are savings 
banks, properly so called. They are intended to encourage 
saving by taking care of the money saved. The service they 
render the depositor consists in keeping his money safe from 
robbers and safe from himself. By keeping a man's money 
and preventing him from yielding too easily to the temp- 
tation to spend it, the savings bank perforins an important 
function. All children are familiar with the so-called 
" penny bank," consisting usually of an earthenware jug into 
which coins are dropped through a narrow opening. To get 
possession of the contents, the child must break the jug, and 
this slight obstacle is supposed to give enough time for reflec- 
tion, and to enable the child to resist the temptation to 
squander the contents. 

The savings bank is practically the same thing. The 
amount deposited in the bank is, of course, at the disposal 
of the owner. Yet it is no longer in his pockets, or in his 
immediate possession; and in order to obtain it he must com- 

1 The question is sometimes asked whether or not another condition is 
also requisite ; namely, the payment of interest. Most economic treatises 
insist that it is a necessary condition for saving. We regard this as a mis- 
take. Interest must be paid to give rise to investment, as we shall ex- 
plain later ; but saving is not dependent on the payment of interest. The 
simple desire to provide for future wants or for unforeseen wants is sufficient 
to give rise to saving. It may even be maintained, without being paradoxi- 
cal, that if investment at interest ever became impossible, saving or hoarding 
would not be done away with, but would be greatly stimulated. Take a 
man who requires $5000 a year to live satisfactorily. If the current rate of 
interest is five per cent, he will have to save only $100,000 in order to live on 
an independent income. But if it became impossible for him to invest his 
savings at interest, he would be anxious to store up as much capital as pos- 
sible for future use. 



THE SOCIAL UTILITY OF SAVING 693 

ply with certain formalities which involve somewhat more 
time and trouble than breaking the "penny bank." 

In order to encourage saving, these banks pay a small in- 
terest on deposits ; but this interest must be regarded merely 
as a sort of premium on saving, a kind of stimulus, and 
should not be too high. The business of the savings bank 
is not to furnish an opportunity for investing capital, but to 
enable people to put aside a little money, and thus to create 
capital. If, when this capital has been amassed, the depos- 
itor wants to invest it, i.e. make it yield interest, he may 
withdraw it from the bank (the role of the savings bank 
having been performed), and intrust it to other institutions, 
such as those already referred to in the sections on credit and 
banks. 

Formerly all savings banks were private institutions ; but 
to-day, in many countries, they are sometimes founded by the 
government. France and England, for instance, have sav- 
ings banks connected with their postal system ; innumerable 
post-offices throughout the country offer opportunity and 
encouragement for putting aside small sums of money. The 
governmental savings bank of Vienna, Austria, is celebrated 
for its perfect mechanism and economical administration. 
In France, the private savings banks are practically govern- 
mental concerns, for they are obliged to deposit their funds 
in the Public Treasury. 

(2) Mutual providential societies consist of persons paying 
monthly dues ; at the end of a certain period, say twenty 
years, the accumulated capital is divided among the members. 
Men can save more when they are organized than when they 
are isolated, because the rule of monthly payments makes 
saving a habit and a necessity, and because organizations 
can make better use of the accumulated funds than a single 
individual. Surviving members, moreover, usually profit by 
the sums paid by those who die before the funds are divided. 

(3) Consumers' cooperative societies, although the name 
implies the intention to consume and not to save, serve also 



694 PRINCIPLES OF POLITICAL ECONOMY 

as savings institutions by removing the obstacle that makes 
saving so difficult, and which seems nevertheless to be a 
necessary feature of all saving, viz. abstinence or privation. 
These societies succeed in solving the apparently insoluble 
problem of making saving automatic and unconscious. Their 
plan, which we have already described, is both simple and 
ingenious. Goods bought at wholesale prices are sold to the 
members at the customary retail prices, and the profit thus 
made on the purchases of members is placed, as it were, to 
their credit. At the end of the year, a proportionate share 
of the total profits is either paid out to each member, or kept 
on deposit for him. Thus, if a laborer buys $300 worth of 
goods in a cooperative store, and the store makes a profit 
of ten per cent, he may be said to save $30. This saving 
involves no effort, no abstinence, no restriction in the amount 
of goods he consumes. He has consumed just as much as 
before ; he has been provided with goods of better quality ; 
he has paid no more than these goods would cost else- 
where ; and despite all this he has actually saved money. It 
may be said, moreover, that the more the laborer buys, the 
greater is the sum he earns for himself ; or, to put it some- 
what paradoxically, the more he spends the more he saves ! 

(4) Cooperative credit societies, which are simply popular 
banks designed to receive money from the people in order 
to return it to them in the form of loans, serve quite as well 
for saving money as for lending it ; they have even been 
called " perfected savings banks." This feature characterizes 
the German people's banks founded by Schulze-Delitzsch 
(see page 396) and the Italian people's banks founded by 
Luzzatti. 

III. The Social Utility of Saving 

The social usefulness of saving consists in forming, by 
means of united individual savings, large amounts of capital 
that can be employed by business enterprises according to 
their needs. Saving possesses the same utility for society as 



THE SOCIAL UTILITY OF SAVING 695 

a whole as for individuals : it provides for future wants. Its 
utility is almost incalculable, and of such a nature that no 
progressive nation can do without it. Hence, as saving is 
useful to a nation, it is the duty of those who can save, to do 
so. It devolves upon the rich and those that live on inde- 
pendent incomes to save, because they can do it most readily, 
without foregoing the satisfaction of any legitimate want. 

This, however, is not the popular opinion ; the general 
public does not regard with favor the rich who save. Even 
Montesquieu wrote that " when the rich spend little, the poor 
die of hunger." But we have already pointed out the cur- 
rent misconceptions with regard to the effects of spending. 
(See page 671.) The rich man who saves that part of his 
income which exceeds his legitimate wants, and who applies 
it productively by investing it, confers a benefit on all; for, 
as we shall see in discussing investment, he simply transfers 
his right to consume to the laborers whom he employs with 
his capital. (See page 698.) 

The rich man whose avarice prompts him to neglect the 
satisfaction of even his necessary wants, and who does not 
invest his money productively, but hoards it in the strictest 
sense of the term, really harms no one but himself. Such 
men, moreover, are very rare. Each piece of money that is 
put aside must be regarded simply as an " order," giving the 
possessor the right to claim a certain part of existing 
wealth. (See page 220.) The man who saves declares that 
for the present he will not claim his share of the social stock 
of wealth. That is a right which he may exercise at his own 
pleasure ; no one else suffers through his neglect to use it. 
The share that he might have consumed, and which he 
abandons, will simply be consumed by others. 

It may be asked whether the poor also should not be ad- 
vised to save. Is not saving more important for them than 
for the rich ? Moralists and economists do indeed give this 
advice to the poor. But the advice is not always good. We 
shall not make the customary plea that saving is often impos- 



696 PRINCIPLES OF POLITICAL ECONOMY 

sible. We hold that saving is always possible, even for the 
poorest people, because the elasticity of human wants is mar- 
vellous ; wants not only may be increased in number up to 
infinity, but it is equally true that they may be reduced 
almost indefinitely. A man having only a pound of bread 
a day may accustom himself to eating only on alternate days, 
thus saving half. Do not even the poorest classes spend 
hundreds of thousands for drink and tobacco ? It is certain 
that they could save this amount, and that they would be 
better off for doing so. 

Notwithstanding this, the advice to the poor to save is not 
always justified. Whenever saving involves a curtailment 
of the necessary or even the merely legitimate wants of man, 
the effect is rather bad than good. It is absurd to sacrifice 
the present to the future, especially when the present sacrifice 
is likely to endanger the future. Every present expenditure, 
private or public, which results in the physical or mental 
development of man, should be sanctioned without hesita- 
tion, not only as good in itself, but as preferable even to sav- 
ing. What better use can a man make of wealth than to 
improve his health or to develop his mind? The use of alco- 
hol and tobacco, to be sure, should be discouraged. But the 
sums used for these purposes would be better employed at 
the butcher's, the baker's, and the clothier's, than at the sav- 
ings bank; for it must be borne in mind that the money 
spent for drink is not usually taken from the superfluous, but 
from the necessary expenditure. Good food, salubrious cloth- 
ing, healthful homes, comfortable furniture, medical care, 
instructive books, promenades and voyages, exercises and 
amusements, are not only permissible pleasures; they are 
wants which should be developed. Their satisfaction consti- 
tutes the best investment, because they increase the worth of 
man and heighten his productiveness. 1 

1 Benjamin Franklin said, " Empty your purse into your head ; then you 
can never lose your money, and you will always be sure of a high rate of 
interest." 



INVESTMENT 697 

Much the same advice may be given to the rich. Although 
their duty is to save, we do not maintain that saving is their 
sole or even their principal function. If they saved their 
entire incomes, and if a spirit of penitence prompted them to 
live on bread and water, they would be neglecting one of 
their important social functions, which consists in giving rise 
to new wants, setting the example of legitimate luxury, and 
stimulating economic progress by exemplifying the possibili- 
ties of human development. It should be remembered, more- 
over, that aside from personal expenditures there are other 
socially important and useful ways of spending money. Phil- 
anthropic, scientific, artistic, and religious undertakings can 
be carried on only by the wealthy, and are sometimes more 
important than saving. 

We may therefore say, by way of conclusion, that saving 
is a luxury (however strange the association of these two 
terms may appear) scarcely accessible to any but rich socie- 
ties, and confined to those few persons that possess a supera- 
bundance of wealth. Statistics show that the countries 
which accumulate savings are not numerous, and that even 
in these countries the amount saved rarely exceeds one-tenth 
of the national income. This fraction, although small, seems 
to be sufficient ; there is no lack of capital available for all 
kinds of useful or even foolish enterprises. 

IV. Investment 

In conformity with an old tradition we shall study invest- 
ment in the same chapter as saving, although in reality 
investment is an entirely different operation. It is of course 
true that investment presupposes saving, since we cannot 
invest unless we have "put something aside"; this is the 
reason for the close association of the two operations in the 
mind of the public and even of some economists. Saving 
and investing are, however, quite distinct. To save is always 
a way of consuming ; it is postponed consumption, and means 



698 PRINCIPLES OF POLITICAL ECONOMY 

that something has been kept for future use. To invest, on 
the other hand, is to transfer to another person one's power 
to consume. This is usually accomplished by means of 
money; those to whom the power is transferred use this 
money productively, generally by employing laborers. To 
invest is to earn something with our capital, to use our capi- 
tal productively. Investment, therefore, is not an act of 
consumption, but of production. 

There was a time when investment was difficult, almost 
impossible, for two reasons : — 

(1) Because there was no opportunity to invest. At a time 
when lending money at interest was prohibited, or could be 
effected only under some disguised form, when the principal 
borrowers of modern business life — corporations and stock 
companies — were unknown, and when the renting of 
real estate was an exceptional transaction, there could be but 
little investment of money. All that men could do with 
their savings was to hoard them or purchase land. 

(2) Because there was no security. Men will not willingly 
invest their money except in countries possessing good gov- 
ernment, good laws, and the habit of commercial honesty; 
for these are the features which reduce the risk of robbery, 
invasion, governmental confiscation, and the dishonesty of 
powerful debtors. The development of investment depends 
on security, and men will not give up their savings to others 
for productive consumption, in exchange for a promise to re- 
pay, unless there is comparatively little risk of losing them. 

At the present time, political security, that is to say, immu- 
nity from governmental interference and the certainty of 
the legal enforcement of contracts, is fairly well guaranteed. 
What may be called moral security, or faithfulness in keep- 
ing promises, is less developed. 

The present epoch, moreover, offers to the prospective in- 
vestor thousands of inducements unknown to our ances- 
tors. Stock exchanges now deal in innumerable varieties of 
" investments." Countless industrial and financial enter- 



UTILITY OF INVESTMENT 699 

prises, stock companies, railroads, government and municipal 
loans, furnish unnumbered opportunities for the investment 
of money. They promise more or less interest, and often pay 
what amounts to a premium on the sum invested, the returns 
sometimes being greater than the original investment. In 
continental European countries additional inducement to 
invest money is offered by the promise of lottery prizes 
sometimes amounting to $100,000 — inducements of an ex- 
ceedingly questionable ethical nature. 

The social usefulness of investment is incontestable. 
Without investment the most remarkable enterprises of 
modern times would be impossible for want of the required 
capital. From the standpoint of society as a whole, invest- 
ment must be regarded as an employment of wealth that is 
more altruistic than even saving or spending. Saving and 
spending are necessarily more or less egoistic ; but the in- 
vestor, instead of keeping his wealth for his own immediate 
or future consumption, transfers it to others in order that 
they may consume it productively. 1 Let us suppose that he 
uses his savings to buy some of the stock issued by a mining 
or a railroad company. 2 He pays the company the money 
value of the stock. Does the company merely save the 
money? Surely not, for if this were its purpose, there 
would be no real need to borrow. It uses the money to 
dig shafts or tunnels, to construct machinery, to buy steel 
rails, coal and ties, to pay present employees and to hire 
others. The same is true of all investments. 

Yet the man who invests is sometimes quite as much the 
object of popular animadversion as the man who hoards. 
People mistakenly assume that the man who keeps securities 

i Doubtless the capitalist does not perform this service for philanthropic 
reasons. He seeks profit. But his altruism, although unconscious, has the 
same results as if it were intentional. As John Stuart Mill correctly remarks, 
" We help the workers, not by what we consume, but only by what we our- 
selves do not consume." 

2 We speak advisedly of stock issued by the company. For if the stock 
were purchased at the bourse, it would simply be transferred, and the 



700 PRINCIPLES OF POLITICAL ECONOMY 

in his safe is engaged in hoarding, and that he withdraws 
money from circulation. As a matter of fact, his money is 
not in his possession, but out in the business world, stimu- 
lating business and employing laborers in all parts of the 
world. Perhaps his money is used to hire Chinese laborers 
on the trans-Siberian railway ; perhaps it is used to employ 
Kaffirs in the mines of the Transvaal. In such cases, i.e. 
whenever capital gives employment to foreign labor and not 
to native workers, there is some foundation in the prejudice 
against investors ; for then investment is a kind of absentee- 
ism in capital. But if foreign investments are intelligently 
made, they will bring back to the nation, in the form of 
profits and dividends, more wealth than has been sent abroad. 

capitalist whose case we are investigating would merely be substituting him- 
self for the previous owner of the stock. Even in this case, however, the 
investment of capital usually means its productive employment, for the capi- 
talist who has sold the stock is obliged to make some use of the proceeds ; and 
it is probable that he has sold his stock simply because he has found some 
more profitable use for his capital. 



INDEX 



absenteeism, 298, 684 ff. 

abstinence, 130, 556, 559. 

abundance, 145. 

accidents, 136, 539. 

adulteration, 153, 204, 680. 

advertising, 166 n, 203, 204, 680. 

agriculture, 75, 80 n, 93, 97 n, 167, 172, 

606. 
allotments, 602. 

American Federation of Labor, 533 ff. 
anarchism, 29 n, 31, 460, 461. 
Anderson, 589 n. 
Anti-Corn-Law League, 313. 
apprenticeship, 179. 
arbitrage, 387 n. 
arbitration, 537 ff. 
Aristophanes, 237. 
Aristotle, 8, 187, 434, 556, 565. 
army, 85 n. 
art, 676. 

association, 39, 156 ff. 
Austrian school, 20, 190 n, 655. 
autonomous producers, 166, 633. 

Bagehot, 131. 

Bakunin, 29 n. 

balance of accounts, 294. 

balance of trade, 291. 

bank notes, 375, 389, 390, 400, 417. 

Bank of France, 269 n, 415. 

banks, 367, 396, 399, 402 ff., 571. 

banks, savings, 692. 

Banks, Scotch, 417. 

Banks of U. S., 404. 

barter, 210. 

Bastiat, 23 n, 25 n, 31, 38, 59, 60, 61 n, 

113, 152, 220 n, 314. 
Baudrillart, 23 n. 
Bellamy, 29 n. 
Bentham, 566. 
bills of credit, 274. 
bills of exchange, 281, 361. 
bimetallism, 234, 242, 246, 251, 252, 254. 
biologico-sociological school, 21. 



birth-rate, 452, 668. 

Bismarck, 314. 

Bland-Allison Act, 244. 

Bliss, W. D. P., 85 n. 

Boehm-Bawerk, 20 n, 57 n, 122 n, 126??., 

558, 560. 
bonanza farms, 106 n. 
Bonar, James, 11 n. 
bond-deposit system, 407. 
bond-security system, 419. 
book credits, 285. 
Bourgeois, 40 n. 
brassage, 233 n. 
Buchez, 649. 
building associations, 397, 682. 

Cairnes, 24 n. 

call loans, 372. 

Calvin, 566. 

Cameron, 210. 

canals, 210 n. 

Cantillon, 9. 

Capital, 69, 113, 116 ff., 118, 120, 122, 123, 
126 n, 127, 129, 145, 159, 471, 475, 481, 
490, 553 ff ., 558, 564, 570, 623, 629, 650. 

capitalism, 119, 135. 

Carey, H. C, Gin, 318, 588n. 

Carlyle, 39, 40 n. 

Catholic social reform, 35, 36, 551, 563. 

Cauwes, 24 n. 

charity, 447. 

checks, 287. 

Chevreuil, 18 n. 

child labor, 522 ff. 

Christian social reform, 35, 37. 

cities, 681. 

Clark, J. B., 499, 513, 638 n, 646. 

classical economics, 69, 422, 553. 

clearing house, 287. 

clipping, 235 n. 

coal mines, 431. 

Cobden, 213, 496. 

coefficients of production, 144. 

coinage, free, 233 n, 236. 



701 



702 



INDEX 



coinage, gratuitous, 233 n. 

coins, 217 ff., 220,232. 

Colbert, 134, 312, 313. 

Colins, 29 n. 

Collectivism, 29 n, 30, 143 w, 150 n, 155, 

170, 467 ff., 472, 477, 502, 550, 632 ff., 

646, 654 n. 
colonial markets, 185. 
commerce, 77, 80 rc, 183, 202, 292 n, 336. 
communism, 30, 199 n, 459 ff., 462. 
communistic manifesto, 467 n. 
competition, 29, 141, 151 ff., 194 n, 204, 

425ff.,631ff. 
Comte, 2 n, 25 n, 39. 
concentration, 166 n. 
conciliation, 537 ff. 
Condillac, 52, 198. 
conquest, 603. 
constraint, 82. 
consumption, 120, 444, 479, 652, 655 ff., 

677, 693. 
contract, 156. 
cooperation, 37, 39, 155, 169, 205, 396, 

478, 479, 481, 552, 648 ff., 652, 677, 693. 
corporations, 638, 640. 
corporative economy, 133. 
cost, 52, 189, 193. 
cost of production, 153, 193, 589, 626, 

627 n, 628. 
Courcelle-Seneuil, 23 n, 130 n, 560. 
Cournot, 20. 
credit, 267, 356 ff., 363, 366, 393, 564, 690, 

693. 
crime, 441, 448 ff. 

crises, 136, 141 ff., 144 n, 388 n, 680. 
Cromwell, 312. 
currency principle, 417. 
customs duties, 312 n. 

demand and supply, 139, 151, 188, 195, 496. 
Demolins, 86 n. 
department stores, 164 n. 
dependents, 450, 452. 
deposits, 368. 

depreciation of money, 223. 
desirability, 57, 196. 
determinism, 27 n. 
diminishing returns, 92, 585. 
discount, 357, 370, 388. 
distribution, 421, 437, 438, 454, 479. 
dividends, 532 n, 577, 680. 
division of labor, 173 ff., 176, 447. 
domestic economy, 133. 
drafts, 282. 
Dumoulin, 566. 



Dunoyer, 23 n. 
Dupuit, 57 n. 
duration of life, 85 n. 
duties, 312 n, 315 n, 353. 
dynamic society, 329. 

economic man, 17. 

economics, object of, 2. 

economics, rise of, 7 ff. 

economics, scope of, 2, 3. 

Edgeworth, 20 n. 

egoism, 82. 

Elberfeld system, 453 n. 

Ely, R. T., 35 n, 40. 

employer and employee, 135. 

employers, 157, 542. 

Engel, Dr. , 663. 

Engels, Fr., 29 n, 30, 467 n. 

engrossing, 151. 

entrepreneur, 75, 484, 568, 623, 638. 

environment, 86 ff. 

equal sharing, 455 ff. 

Espinas, 27 n, 181. 

ethics, 2. 

evolution, 26. 

exchange, 183, 184, 186, 187, 196, 197, 201 

expenditure, family, 662. 

experiment, 15 ff. 

exploitation theory, 560, 633. 

exporting point, 384 n. 

exports, 294, 306. 

Fabian Society, 29n, 467 n. 
factors of production, 69. 
factory laws, 492. 
factory system, 134. 
fair wages, 551. 
fairs, 205 n. 
fair trade, 352. 

family, 156, 201, 448, 603, 677. 
family economy, 132. 
farmers' associations, 168. 
Fawcett, 342. 

fellow-servant doctrine, 543. 
female labor, 524 ff. 
fermage, 608. 
Ferrara, 23 n. 
fertility, 597. 
Fetter, 11 n. 
fiat money, 261 n. 
final utility, 54 ff., 189, 573 ff., 655. 
Fisher, Irving, 20 n. 
food, 40 n, 663, 666 ff. 
Fourier, 29 n, 30, 39, 80, 154 n, 179, 454, 
460 n, 462, 479, 678. 



INDEX 



703 



Franklin, Benj., 57 n, 439. 
free bank system, 407. 
free contract, 422. 
free trade, 331, 340, 342. 
French Revolution, 141. 

Gautier, 41 n. 

George, Henry, 616. 

German labor laws, 541 ff . 

Gide, 24 n, 40 n, 230 n. 

gift, 436. 

glaciers, 100, 102. 

gold, 241, 253, 256 n, 257. 

Gossen, 20 n, 57 n. 

Gothenburg system, 676 n. 

Gournay, 23 n. 

government banks, 403. 

government intervention, 24, 31, 33, 36, 

37. 
greenbacks, 261 n, 277. 
Gresham's law, 235, 237 ff . 
guilds, 133, 185, 489. 
Gun ton, G., on wages, 504. 

Hamilton, 242, 315. 

Hargreaves, 108. 

Herckenrath, 230 n. 

Herron, G. D., 35 n, 37. 

Hildebrand, 14 n. 

Hill, Octavia, 684. 

historical school, 14, 17. 

hoarding, 688. 

Hobson, J. H., 638. 

holidays, 84. 

Holmes, G. K., 437. 

home economy, 132. 

homestead law, national, 612. 

homestead laws, states', 395. 

hours of labor, 84, 179, 182, 447, 521 ff. 

houses, 106. 

household community, 677. 

housing, 41 n, 681. 

hucksters, 202. 

Icaria, 460 n, 463. 
idleness, 448. 
Ihering, 230 n. 
imitation, 42 n. 
immigrants, 457. 
imports, 294, 303. 
improvidence, 450, 688. 
incomes, 437, 455 ff., 458, 484. 
index numbers, 226. 
indifference, law of, 188 n. 
indolence, 443. 



inductive method, 15. 

industry, 183. 

inflationists, 272 n. 

inheritance, 433, 436, 443, 445, 452, 464 ff., 

620. 
instruments of production, 70 n. 
insurance, social, 453, 539. 
intemperance, 675, 676 n. 
interest, 295, 357, 484, 553 ff., 563, 577. 
invention, 48 n, 74, 624. 
investment, 697. 

Jacquart, 108. 

Jannet, Claudio, 482. 

Jevons, 19, 20 n, 57 n, 82, 88 n, 142 n, 

188 n, 195, 217 n, 219, 286, 421, 506??, 

551 n. 
Juglar, 388 n. 
jurisprudence, 2. 

Kartellen, 155. 
Ketteler, 35 n. 
King, Gregory, 188. 
Knights of Labor, 532 ff. 
Kropotkin, 29 n. 

labor, 59, 69, 71ff.,73, 89, 112, 141, 189, 

193, 488, 490 ff., 496, 521 ff., 547, 593, 

634 ff., 645. 
labor co-partnership, 648. 
labor organizations, 491, 528 ff. 
labor insurance, 492, 539 ff . 
labor laws, 33, 492. 
labor theory of interest, 560. 
Laffitte, 231. 

laisserfaire, 10, 23 ff., 32. 
land, 69, 86 n, 89 ff., 119 n, 455, 590 ff., 

606, 629. 
land as property, 431, 590 ff. 
land-rent, 582 ff. 

large-scale production, 161 ff., 472. 
Lassalle, 29 n, 30, 467, 501, 504, 654 n. 
Latin Union, 248. 
Launhardt, 20 n. 

Laveleye, E. de, 33 n, 142, 147m, 201 n. 
laws in economics, 3, 4, 6. 
Leclaire, 644, 618. 
legal tender, 232, 241, 379 n. 
Leroux, 39. 
Leroy-Beaulieu, Paul, 24 n, 35 n, 105 n, 

239, 365 n, 441 n, 477, 578, 642, 646. 
liberal school, 10, 23, 36, 550. 
Liebknecht, 502. 
List, Friedrich, 317. 
loans, 357, 436, 563, 577 ff . 



704 



INDEX 



local option, 676 n. 
lot cles debouches, 148. 
Lowe, 227 n. 
Luddites, 108. 
luxury, 663, 673 ff., 697. 

MacCulloch, 24 n. 

machinery, 96, 103, 107, 108, 110, 111, 

179, 186. 
Madison, 315. 

Malthus, 11, 450,498, 666 ff. 
manufacture, 134. 
Marco Polo, 201. 
markets, 148, 176, 185 ff. 
Marshall, 20 n, 64 n, 109, 497. 
Marx, Karl, 29 n, 30, 43 n, 59, 60 n, 61, 

68, 129 n, 454, 467 n, 469 n, 470, 471 n, 

477,554, 560, 633 ff. 
Menger, Karl, 20 n, 57 n, 227 n, 559. 
mercantilism, 9, 311. 
merchants, 185 n, 201, 680. 
metayer system, 613 n. 
Mill, James, 560. 
Mill, John Stuart, 24 n, 42, 115, 154, 

335 n, 440, 498, 500, 654 n. 
Molinari, de, 24 n, 641. 
money, 8, 44 n, 65, 130, 146 ff., 201, 211, 

213 ff., 218, 221 n, 228, 236, 240, 242, 

261, 290, 400, 445, 556, 570, 690. 
monometallism, 242, 250. 
monopoly, 153 ff., 194 n, 625 ff. 
moral restraint, 667. 
mortgages, 393. 
motive forces, 96. 
mutual societies, 693. 

national hank notes, 420. 
national banks, 404. 
nationalism, 30. 
nationalization of land, 614 ff . 
natural law, 3, 5, 24, 30. 
nature, 86ff.,119. 
normal value, 139. 

occupancy, 429. 

ophelimity, 48. 

optimism, 25. 

organic theory, 21. 

overproduction, 107, 136 ff., 156, 450 n. 

Owen, Robert, 29 n, 459 n, 633. 

Paepe, de, 29 n, 467 n. 
pain and labor, 80. 

paper money, 227, 240, 258 ff., 261, 
272 ff., 276. 



Pareto, 48, 144, 195. 

Patten, S. N., 20 n, 57 n, 329. 

pauperism, 437, 444. 

Peabody Fund, 683. 

pedlers, 202. 

people's banks, 396. 

pbysiocrats, 9, 10, 75. 

piece wages, 549. 

pleasure and pain, 52. 

pools, 151. 

population, 90, 451, 598, 666 ff. 

postage currency, 279. 

premium for gold, 271. 

premiums to producers, 350. 

prescription, 430. 

price, 64, 187, 190 ff., 195, 224, 225 ff., 

252 ff., 273, 392, 587. 
price statistics, 515 ff. 
production, 71, 120, 132, 137, 442, 491, 

558, 664. 
productivity theory, 505, 558, 574. 
professions, 77. 
profits, 69, 70 n, 154, 484. 555, 568, 623 ff ., 

680. 
profit-sharing, 642 ff., 652. 
progress, 113. 
prohibition, 676 n. 
promissory notes, 361. 
property, 8, 29, 428, 430, 432, 460, 469, 

480, 553, 597, 600 ff . 
protection, 310, 318, 350, 626. 
Protestant social reform, 37. 
Proudhon, 29 n, 50 n. 
purchase, 210, 678. 
pure economics, 2, 3. 
pure food laws, 205 n. 

quasi-rents, 192 n. 
Quesnay, 9, 484 n. 

Raiffeisen loan societies, 395. 

railroads, 186, 209. 

rate of exchange, 380. 

ratio of gold and silver, 234, 242. 

realistic school, 14. 

reciprocity, 352. 

rent, 69, 414, 436, 582 ff., 627 ff. 

reserve, 372, 389. 

Ricardo, 11, 59, 62 n, 502, 583. 

right to existence, 449. 

right to relief, 447, 450. 

right to work, 450. 

roads, 208. 

Rochdale system, 679 ff. 

Rodbertus, 500, 636. 



INDEX 



705 



safety-fund system, 407. 

Saint-Simon, 29 n., 30, 464. 

sale, 210. 

Saumaise, 566. 

saving, 129 ff., 452, 475, 665, 688 ff. 

Say, J. B., 11, 21, 23 n, 50 n, 52, 148, 

484 n, 502, 558, 624. 
Schulze-Delitzsch banks, 396. 
seigniorage, 233 n. 
Senior, 24 n, 54, 130 n, 556, 559. 
services, 69, 77, 80 n. 
shares of stock, 432, 577. 
Sherman Act, 245, 251. 
shipping-point, 384 n. 
shop-keepers, 203. 
silver, 228 n, 241, 256 n. 
single tax system, 616. 
slavery, 132, 157, 431, 488. 
Smith, Adam, 10, 59,. 68, 76, 127 n, 174, 

• 186, 266,484^. 
social democracy, 31 n, 32. 
social economics, 2, 3, 8. 
socialism, 28 ff., 437, 440, 447, 454 ff., 632, 

646, 650 n. 
solidarity, 31, 181, 448, 452, 480. 
Spahr, Dr. C. B., 438. 
speculation, 624. 

Spencer, Herbert, 22, 431 n, 600 n. 
spending, 665, 670 ff. 
state socialism, 31 n, 32, 155. 
static societies, 329. 
stock, 432, 577. 
stock companies, 638, 640. 
strikes, 520, 535 ff. 
subdivision of land, 620 ff. 
Suffolk Bank, 406. 
Sully, 134. 

superintendence, 75, 624. 
sweating system, 137. 
syndicates, farmers', 205. 

Tacitus, 174. 

Tarde, G., 22 n, 40 n, 42 n, 48 n. 
tariff, 312, 315 ff., 352. 
Taussig, 279. 



taxes, 631 n. 

tenant system, 610. 

Thiers, 314. 

Thompson, R. E., 325. 

Thornton, 500. 

Thuenen, von, 57 n, 548 n, 576. 

time, 83, 93, 561. 

token money, 236. 

Tolstoi, 39, 42. 

Torrens system, 605. 

trade, 8, 77, 80 n, 133, 201 ff., 291 ff., 

301 ff., 680. 
trades union, 490, 491, 528 ff., 652. 
transportation, 76, 80 n, 201, 206, 294. 
Treasury notes, 245, 278. 
treaties of commerce, 353 ff. 
tribal property, 601. 
truck system, 492 n. 
trusts, 151, 155, 161 ff., 194 n. 
Turgot, 502, 566, 578. 

unearned increment, 590 ff . 

use theory of interest, 558. 

usury, 36, 557 ff . 

utility, 46 ff., 52 ff., 187 n, 189, 655 ff. 

value, 49, 140, 186 ff ., 196, 477, 655. 

wage contract, 548, 561. 

wage-earners, 166, 436, 489. 

wages, 69, 136, 158, 231 n, 484, 487 ff., 

492 ff., 501 ff., 505 ff., 514 ff., 546 ff., 

642, 651. 
Walker, Francis, 493 ff., 506. 
Walras, Le'on, 20 n, 21 n, 57 n, 144, 632 n. 
wants, 40 ff, 221, 655, 668, 673, 688. 
wealth, 42, 46 ff., 120, 122, 437, 456, 457. 
Wells, D. A., 332. 
White, Horace, 275. 
Wood, Stuart, 513. 
working classes, 489. 
workshop economy, 134. 

Xenophon, 7. 



LbJe3G 



i i- f, _ 'PiQ 



